MORGAN STANLEY & CO. INTERNATIONAL plc Half-yearly financial report … · 2020-03-08 ·...

Registered Number: 02068222

Registered Office:

25 Cabot Square

Canary Wharf

London E14 4QA

MORGAN STANLEY & CO. INTERNATIONAL plc

Half-yearly financial report

30 June 2019


CONTENTS

Page

Interim management report 3

Directors’ responsibility statement 20

Independent review report to Morgan Stanley & Co. International plc 21

Condensed consolidated income statement 22

Condensed consolidated statement of comprehensive income 23

Condensed consolidated statement of changes in equity 24

Condensed consolidated statement of financial position 26

Condensed consolidated statement of cash flows 27

Notes to the condensed consolidated financial statements 28


INTERIM MANAGEMENT REPORT

3

The Directors present their interim management report and the condensed consolidated financial statements

(“Interim Financial Statements”) of Morgan Stanley & Co. International plc (the “Company”) and all of its

subsidiary undertakings (together the “Group”), for the six month period ended 30 June 2019. This interim

management report has been prepared for the Group as a whole and therefore gives greater emphasis to

those matters which are significant to the Company and its subsidiary undertakings when viewed as a

whole.

The interim management report contains certain forward-looking statements. These statements are made by

the Directors in good faith based on the information available at the time of their approval of this report and

such statements should be treated with caution due to the inherent uncertainties, including both economic

and business risk factors, underlying any such forward-looking information.

RESULTS AND DIVIDENDS

The Group’s profit for the six month period, after tax, was $361 million (30 June 2018 restated: $684

million).

On 1 March 2019, as part of Brexit reorganisations, the Company paid a dividend in specie of $531 million

to Morgan Stanley Investments (UK) (“MSIUK”), thereby transferring its equity interest in Morgan Stanley

Europe Holding S.E. (“MSEHSE”) and Morgan Stanley Europe S.E. (“MSESE”). On 31 May 2019, the

Directors approved a coupon payment on the Additional Tier 1 (“AT1”) capital instruments of $119 million

(2018: $119 million; see note 12). No other dividends were proposed or paid during the six months ended

30 June 2019 (2018: $nil).

INTRODUCTION

The principal activity of the Group is the provision of financial services to corporations, governments and

financial institutions.

The Company operates branches in the Dubai International Financial Centre, the Netherlands, Poland, the

Qatar Financial Centre, South Korea and Switzerland.

The Company is authorised by the Prudential Regulation Authority (“PRA”) and regulated by the PRA and

the Financial Conduct Authority (“FCA”). In addition, the company is a registered swap dealer and is

regulated by the United States (“US”) Commodity Futures Trading Commission (“CFTC”).

There have not been any changes in the Group’s principal activity during the period and no significant

change in the Group’s principal activity is expected.

The Group’s ultimate parent undertaking and controlling entity is Morgan Stanley, which, together with the

Group and Morgan Stanley’s other subsidiary undertakings, form the “Morgan Stanley Group”.

The Morgan Stanley Group is a global financial services firm that maintains significant market positions in

each of its business segments: Institutional Securities, Wealth Management and Investment Management.

The Morgan Stanley Group provides a wide variety of products and services to a large and diversified

group of clients and customers, including corporations, governments, financial institutions and individuals.

As a key contributor to the execution of the Morgan Stanley Group’s Institutional Securities global

strategy, the Group provides capital raising; financial advisory services, including advice on mergers and

acquisitions, restructurings, real estate and project finance; corporate lending; sales, trading, financing and

market-making activities in equity and fixed income products, including foreign exchange and

commodities; and investment activities.



4

BUSINESS REVIEW

Global markets and economic conditions

Global economic growth slowed from 3.7% for 2018 to 3.0% in the first half of 2019. The loss of growth

momentum was broad-based across both developed and emerging markets. In developed markets, growth

softened in the second quarter of 2019 after a brief moderate rebound in the first quarter. In emerging

markets, growth stayed sluggish throughout the first half of 2019. Trade tensions remained the key

overhang on corporate sentiment, which weighed on capital spending and overall economic activity. In the

United Kingdom (“UK”), the Monetary Policy Committee has stayed on hold, softened its hawking bias in

response to weak growth and increased Brexit uncertainty, and guided to easier policy in a hard Brexit. In

Europe, the European Central Bank (“ECB”) kept policy rates unchanged in the first half of 2019 and

announced the launch of new Targeted Longer-Term Refinancing Operations later in the year in March

with full details of the operations announced in June 2019. In July 2019, the ECB signalled that it would

cut rates further and possibly restart quantitative easing. In terms of policy, the Federal Reserve kept

interest rates unchanged in the first half of 2019, but financial conditions in the US eased due to the Federal

Reserve’s dovish tilt earlier in the year. In July 2019, the Federal Reserve cut interest rates by 25bp.

Policymakers in China have implemented fiscal easing measures and accelerated government bond

issuance due to continued downside pressures on growth. Elsewhere in the world, other major central banks

have adopted a more dovish policy stance, and select central banks, such as the Reserve Bank of Australia,

Reserve Bank of India, Bank of Korea, Bank Indonesia and Central Bank of Brazil, have moved to cut

interest rates.

UK withdrawal from the EU

On 23 June 2016, the UK electorate voted to leave the European Union (the “EU”). On 29 March 2017, the

UK invoked Article 50 of the Lisbon Treaty which triggered a two-year period, subject to extension (which

would need the unanimous approval of the EU Member States), during which the UK government

negotiated a form of withdrawal agreement with the EU.

On 22 March 2019, the UK and other EU Member States agreed to an extension of the two-year period to

22 May, 2019, (if the UK Parliament approved the withdrawal agreement by 29 March 2019) or 12 April

2019 (if it did not). On 11 April 2019, the UK and the other EU Member States agreed to a further

extension to 31 October 2019. Absent any further changes to this time schedule, the UK will leave the EU

on 31 October 2019.

The proposed withdrawal agreement includes a transition period until December 2020 and provides that the

UK will leave the EU single market and will seek a phased period of implementation for a new UK-EU

relationship that may include the legal and regulatory framework applicable to financial institutions with

significant operations in Europe, such as Morgan Stanley.

The withdrawal agreement has been rejected by the UK Parliament on 15 January 2019 and on two

subsequent occasions. As a result, the terms and conditions of the anticipated withdrawal from the EU

remain uncertain. Discussions are ongoing within the UK Parliament on the negotiated withdrawal

agreement and the alternatives to it, and between the UK Government, led by the new Prime Minister, and

the EU.

The ongoing political uncertainty in relation to the proposed withdrawal agreement in the UK and the short

time remaining before the scheduled withdrawal date means there is risk that the UK will leave the EU on

31 October 2019 with no agreement in relation to its withdrawal and no transition period.

Potential effects of the UK exit from the EU and potential mitigation actions may vary considerably

depending on the timing of withdrawal, the nature of any transition, implementation or successor

arrangements, and the future trading arrangements between the UK and the EU. This uncertainty may

increase the volatility in the global financial markets in the short- and medium-term and may negatively

disrupt regional and global financial markets. Additionally, depending on the outcome, such uncertainty

may adversely affect the manner in which we operate certain businesses in Europe. These risks are likely to

be heightened in the case where the UK leaves the EU on 31 October 2019 with no agreement in relation to

its withdrawal and no transition period.



5

BUSINESS REVIEW (CONTINUED)

UK withdrawal from the EU (continued)

If the withdrawal agreement (or any alternative agreement) is not agreed and as a result no transition period

applies, our UK licensed entities may be unable to rely on EU passporting rights to provide services in a

number of EU jurisdictions from the date the UK leaves the EU, absent further regulatory relief. Even if a

transition period is agreed, UK licensed entities may lose their rights to provide services in a number of EU

jurisdictions after such transition period unless the new UK-EU relationship provides for such rights.

The Morgan Stanley Group is continuing to prepare its European operations to serve clients regardless of

whether or not a withdrawal or transition agreement is reached. Changes have been made to European

operations in an effort to ensure that the Morgan Stanley Group can continue to provide banking and

investment and other services in EU member states from within the EU where necessary.

These changes include use of a new licenced investment firm, MSESE, based in Germany, which is

passported throughout the EU and will serve EU-based clients where required; and the existing German

licenced credit institution Morgan Stanley Bank AG (“MSBAG”), which will provide licensable banking

activities where required. In addition, a new holding company for this structure has been incorporated,

MSEHSE. The Morgan Stanley Group will also serve EU clients out of branches of these entities in the EU

and existing regulated entities in France and Spain as necessary.

These entities are now operational, and the Morgan Stanley Group is continuing to build out their

capabilities, including onboarding clients and engagement with clients and local regulators. The Morgan

Stanley Group also expects to continue to add personnel to offices in the EU as required to support the

evolving business model, including, from its London operations and its EU branches.

Certain activities currently transacted by the Group including cash and derivatives trading with certain EU

clients have moved, or may in future move, to these additional entities, including cash and derivatives

trading and capital markets activities moving from the Company to MSESE. The extent and timing of these

moves will depend on client preferences and on licencing rules, which in turn will depend on the form of

any withdrawal or transition agreement.

As part of the Group’s Brexit planning to achieve the strategy mentioned above, the Group has made

certain entity structure changes. On 1 November 2018, the Company transferred its investment in MS

France Holdings I S.A.S and its subsidiaries (“MS France Group”) to MSIUK, the Company’s parent

undertaking. On 1 March 2019, the Company transferred its investments in MSEHSE and MSESE to

MSIUK.

As a result of the political uncertainty described above, the proposed post-Brexit structure of European

operations for the Morgan Stanley Group may need to continue to adapt and change. Given the potential

negative disruption to regional and global financial markets, and depending on the extent to which Morgan

Stanley may be required to make material changes to European operations beyond those currently planned

or executed, results of Morgan Stanley’s operations and business prospects could be negatively affected.

However, following the reorganisations and changes effected to date, the Group’s principal activity and

risks remain unchanged and while some business and client activity has or will be transferred from the

Group to other Morgan Stanley Group entities that operate within the EU, the impact to its profitability and

balance sheet is not expected to be material in the short to medium term.



6


Key performance indicators

The Board of directors monitors the results of the Group by reference to a range of performance and risk

based metrics, including, but not limited to the following:

Profitability metrics

Return on shareholders’ equity: The Group’s return on shareholders’ equity was 3.4% for the six month

period ended 30 June 2019 (six month period ended 30 June 2018 restated: 7.3%). Return on shareholders’

equity is defined as annualised profit for the period attributable to the parent as a percentage of ordinary

shareholders’ equity (total equity less Non-Controlling Interest) at the beginning of the year. Return on

shareholders’ equity has decreased for the period as compared to the prior year period primarily as a result

of a decrease in profit to $361 million for the period as compared to $684 million for the prior year period.

Return on assets: The Group’s return on assets was 0.16% for the six month period ended 30 June 2019

(six month period ended 30 June 2018 restated: 0.30%). Return on assets is defined as annualised

profit/loss for the period as a percentage of total assets at the beginning of the period. Return on assets has

decreased as a result of a decrease in profit to $361 million for the period as compared to $684 million for

the prior year period.

Balance sheet assets

Total assets: Total assets of the Group at 30 June 2019 were $488,610 million, as disclosed on page 26.

This is an increase of 10% from 31 December 2018 and is primarily driven by an increase in ‘trading

financial assets’ as a result of fair value movements and increased client demand towards the end of the

period. Total assets continue to be closely monitored.

Capital

The Group monitors its, and the Company’s, capital position against a range of key metrics, including the

following:

Tier 1 regulatory capital: As at 30 June 2019, the Company’s Tier 1 capital ratio was 14.7% (31 December

2018: 15.3%), which is in excess of the required minimum regulatory ratio, as calculated in accordance

with PRA rules, which are based on the fourth EU Capital Requirements Directive and EU Capital

Requirements Regulation (“CRR”), collectively known as “CRD IV”. The Tier 1 capital ratio is defined as

Tier 1 capital divided by risk-weighted assets (“RWAs”). Tier 1 capital was $18,613 million and RWAs

were $126,670 million as at 30 June 2019 (31 December 2018: $19,148 million and $124,950 million

respectively). The Tier 1 capital ratio has decreased from 31 December 2018 primarily as a result of

dividends paid of $650 million.

Leverage ratio: As at 30 June 2019, the Company had a leverage ratio of 4.2% (31 December 2018: 4.6%),

which is above the minimum regulatory ratio of 3% that is expected to apply once European legislation

comes into effect on 28 June 2021. CRD IV, as amended by the European Commission Delegated Act,

compares Tier 1 capital to a measure of leverage exposure, defined as the sum of leverage assets less Tier 1

capital deductions plus off-balance sheet exposures. The decrease in the Company’s leverage ratio was

driven by an increase in on-balance sheet exposures as applied to leverage, and a decrease in Tier 1 Capital.



7


Overview of 2019 Financial Results

Set out below is an overview of the Group’s financial results for the six month periods ended 30 June 2019

(“the period”) and 30 June 2018 (“the prior year period”).

Six months ended Six months ended

in $ millions June 30, 2019 June 30, 2018

Restated(2)

Net revenue(1) 2,824 3,443

Staff related expenses (896) (1,036)

Non-staff related expenses (1,420) (1,432)

Operating expenses (2,316) (2,468)

Impairment (loss) (12) (5)

Net loss on transfer of investment in subsidiary (6) -

Profit before tax 490 970

Income tax expense (129) (286)

Profit after tax 361 684

Six months ended Year ended

in $ millions June 30, 2019 December 31, 2018

Total Assets 488,610 446,199

Total Liabilities 467,900 425,082

Total Equity 20,710 21,117

(1) Net revenue refers to the aggregate of 'Net trading income', 'Net income from other financial instruments held at fair

value', 'Fee and commission income', 'Interest income', 'Interest expense', and 'Other revenue'.

(2) Restated for impact of IAS 12 amendment. Refer to note 1 for further details.

The condensed consolidated income statement for the period is set out on page 22. The Group reported a

profit after tax for the period of $361 million, compared to a profit after tax of $684 million for the restated

prior year period as a result of decreased net revenues, partially offset by reduced operating expenses.

Net revenues for the period decreased 18% to $2,824 million, compared to $3,443 million for the prior year

period.

The decrease in net revenues was driven by decreases in Equity, Fixed Income and Investment Banking

revenues as macroeconomic uncertainties affected market sentiment and trading performance, as well as the

transfer of the Group’s investment in the MS France Group to MSIUK on 1 November 2018.

The decrease in Equity revenues was primarily driven by lower Derivatives and Prime Brokerage revenues.

Derivatives revenues were lower due to 2018 revenues including gains from a number of individually

significant trades, and decreased client demand throughout the period as compared to the prior year period.

Prime Brokerage revenues reduced due to lower client balances and financing revenues.

The decrease in Fixed Income revenues was due to reduced Macro Products revenues, reflecting inventory

management losses as a result of a decline in interest rates and from lower levels of client activity.

Investment Banking revenues decreased due to lower advisory revenues and underwriting revenues.

Advisory revenues decreased due to lower completed M&A activity and underwriting decreased due to

lower initial public offerings and convertible issuances.

Operating expenses decreased from $2,468 million for the prior year period to $2,316 million for the

period.



8


Overview of 2019 Financial Results (continued)

Staff-related expenses decreased by 14% from $1,036 million for the six month period ended 30 June 2018

to $896 million for the six months ended 30 June 2019. The decrease was primarily driven by lower

discretionary compensation as a result of lower Institutional Group revenues and the transfer of the Group’s

investment in the MS France Group to MSIUK on 1 November 2018.

Non-staff related expenses decreased by 1% from $1,432 million for the prior year period to $1,420 million

for the period. This decrease was driven primarily by lower volume-related expenses including brokerage

and transaction taxes, from reduced client activity. This is partially offset by an increase in management

charges from other Morgan Stanley Group undertakings relating to other services. Refer to note 3 for

further details.

The Group’s tax expense for the period was $129 million compared to $286 million restated for the prior

year period. This represents an effective tax rate of 26.3% (30 June 2018 restated: 29.5%) which is lower

than the average standard rate of UK corporation tax (inclusive of the UK Banking surcharge) of 27% (30

June 2018: 27%). The main reason for the lower effective tax rate is the corporation tax benefit of the

Additional Tier 1 coupon payments, partially offset by the non-deductibility of the UK Bank Levy and the

effect of taxes in foreign jurisdictions. The 2018 tax charge has been restated to reflect the amendment to

IAS 12 regarding the presentation of the tax benefit arising from coupons on AT1 instruments. See notes 1

and 5 for further details.

The condensed consolidated statement of financial position presented on page 26 reflects increases in the

Group’s total assets and total liabilities of $42,411 million and $42,818 million respectively, representing

increases of 10% each as at 30 June 2019 when compared to 31 December 2018.

The increase in total assets is driven by increases of $38,895 million in ‘trading financial assets’, $2,633

million in ‘trade and other receivables’ and $2,429 million in ‘cash and short-term deposits’.

The increase in ‘trading financial assets’ is driven by derivative assets, as a result of fair value movements,

and by corporate equities predominantly driven by an increase in client demand towards the end of the

period. The increase in ‘trade and other receivables’ reflects higher collateral pledges in relation to

derivative transactions as a consequence of changes in underlying derivative exposures. The increase in

‘cash and short-term deposits’ is mainly due to increase in cash held with central banks as part of the

Group’s liquidity reserve.

The increase in total liabilities is driven by increases in ‘trading financial liabilities’ of $31,699 million,

‘debt issued and other borrowings’ of $11,822 million and ‘secured borrowing’ of $2,185 million which is

partially offset by a decrease in ‘trade and other payables’ of $2,827 million.

The increase in ‘trading financial liabilities’ is driven by an increase in derivative liabilities as a result of

fair value movements, and in corporate equities, due to an increase in client demand towards the end of the

period. The increase in ‘debt issued and other borrowings’ relates mainly to higher intercompany

borrowings to fund the increase in business activity.

Total equity decreased by $407 million as a result of the dividends paid of $650 million, including the

dividend in specie of MSEHSE and MSESE, offset by profit after tax of $361 million.

The condensed consolidated statement of cash flows presented on page 27 shows an increase in cash and

cash equivalents of $2,429 million during the six month period to 30 June 2019 (six month period to 30

June 2018: net increase of $7,196 million). Net cash inflows from operating activities were $3,195 million

(six month period to 30 June 2018: $8,660 million). This has been partially offset by net cash outflows

from investing activities of $456 million due to the transfer of MSEHSE and MSESE to MSIUK, and net

cash outflows from financing activities due to the payment of the AT1 dividend of $119 million (30 June

2018: $119 million).



9

RISK MANAGEMENT

Risk is an inherent part of the Group’s business activity. The Group seeks to identify, assess, monitor and

manage each of the various types of risk involved in its business activities, in accordance with defined

policies and procedures. The Group has developed its own risk management policy framework, which

leverages the risk management policies and procedures of the Morgan Stanley Group. The risk

management policy framework includes escalation to the Group’s Board of Directors and to appropriate

senior management of the Group, as well as oversight through the Group’s Board of Directors and through

a dedicated Risk Committee of non-executive Directors that reports to the Board of Morgan Stanley

International Limited (“MSI”), the Company’s ultimate UK parent undertaking.

Pages 9 to 26 of the strategic report and note 28 to the consolidated financial statements for the year ended

31 December 2018 provide more detailed qualitative disclosures on the Group’s exposure to financial risks.

Set out below is an overview of the Group’s policies for the management of financial risk and other

significant business risks.

Market risk

Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, implied

volatilities, correlations or other market factors, such as market liquidity, will result in losses for a position

or portfolio.

The Group manages the market risk associated with its trading activities at both a divisional and an

individual product level, and also considers market risk at the legal entity level.

The Group uses the statistical technique known as Value at Risk (“VaR”) as one of the tools used to

measure, monitor and review the market risk exposures of its trading portfolios. The Market Risk

Department calculates and distributes daily VaR-based risk measures to various levels of management. The

following table shows the Group’s Management VaR at the total level, as well as the contribution from

primary risk categories, for the six month period ended 30 June 2019 and for the year ended 31 December

2018.

95% / one-day VaR for the six

months ended 30 June 2019 95% / one-day VaR for the

year ended 31 December 2018

Period Period

in $ millions End Average End Average

Primary Risk Categories 23 19 17 19

Credit Portfolio(1) 6 5 4 4

Less: Diversification benefit(2) (5) (4) (3) (2)

Total Management VaR 24 20 18 21

(1) The Credit Portfolio VaR is disclosed as a separate category from the Primary Market Risk Categories and includes loans that are carried at fair value and associated hedges as well as counterparty credit valuation adjustments and related hedges.

(2) Diversification benefit equals the difference between total management VaR and the sum of the VaRs for the Primary Market Risk Categories and the Credit Portfolio. This benefit arises because the simulated one-day losses for each of the component

categories occur on different days; similar diversification benefits are also taken into account within each category.

The Group’s average Management VaR for Primary Risk Categories for the six month period ended 30

June 2019 was $19 million, unchanged compared to 2018.

The Group’s average Credit Portfolio VaR for the six months ended 30 June 2019 was $5 million,

materially unchanged compared to $4 million in 2018.

The Group’s average Total Management VaR for the six months ended 30 June 2019 was $20 million,

compared to $21 million for 2018 primarily due to increased diversification benefit.



10

RISK MANAGEMENT (CONTINUED)

Credit risk

Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its

financial obligations to the Group. Credit risk includes country risk, which is further described below.

The Group primarily incurs credit risk exposure to institutions and sophisticated investors mainly through

its Institutional Securities business segment. This risk may be incurred through a variety of activities,

including, but not limited to, the following:

entering into derivative contracts under which counterparties may have obligations to make

payments to the Group;

extending credit to clients through lending commitments;

providing short- or long-term funding that is secured by physical or financial collateral whose

value may at times be insufficient to fully cover the repayment amount;

posting margin and/or collateral to clearing houses, clearing agencies, exchanges, banks, securities

firms and other financial counterparties;

placing funds on deposit at other financial institutions to support the Group’s clearing and

settlement obligations; and

investing or trading in securities and loan pools, whereby the value of these assets may fluctuate

based on realised or expected defaults on the underlying obligations or loans.

Credit risk exposure is managed on a global basis and in consideration of each significant legal entity

within the Morgan Stanley Group. The credit risk management policies and procedures establish the

framework for identifying, measuring, monitoring and controlling credit risk whilst ensuring transparency

of material credit risks, ensuring compliance with established limits and escalating risk concentrations to

appropriate senior management.

For further information on the Group’s credit risk management framework, monitoring and control, credit

evaluation and risk mitigation procedures, refer to pages 18 to 20 of the strategic report in the consolidated

financial statements for the year ended 31 December 2018.

The following table shows the Group’s maximum exposure to credit risk and credit exposure for certain

financial assets the Group believes are subject to credit risk and where the Group has entered into credit

enhancements, including receiving cash and security as collateral and master netting agreements. The

financial effect of the credit enhancements is also disclosed in the table. The net credit exposure represents

the credit exposure remaining after the effect of the credit enhancements. Exposure to other Morgan

Stanley Group undertakings is included in this table.



11


Credit Risk (continued)

Exposure to credit risk by class

30 June 2019 31 December 2018

Class

in $ millions Gross credit

exposure(1)

Credit

enhancements

Net credit

exposure

Gross credit

exposure(1)

Credit

enhancements

Net credit

exposure

Recognised financial instruments

Secured financing 94,788 (93,888) 900 95,643 (94,546) 1,097

Trading financial assets:

Derivatives 203,147 (196,999) 6,148 179,311 (173,250) 6,061

Unrecognised financial

instruments

Loan commitments 2,841 (607) 2,234 2,308 (84) 2,224

300,776 (291,494) 9,282 277,262 (267,880) 9,382

(1) Gross credit exposure is the carrying amount which best represents the Group's maximum exposure to credit risk, and for recognised financial instruments is reflected in the condensed consolidated statement of financial position.

Additional information on the exposure to credit risk, including the maximum exposure to credit risk by

credit rating, is presented in note 14.

Country risk exposure

Country risk is the risk that events in, or affecting, a foreign country might adversely affect the Group.

“Foreign country” means any country other than the UK. Sovereign Risk, by contrast, is the risk that a

government will be unwilling or unable to meet its debt obligations, or will renege on the debt it

guarantees. Sovereign risk is single-name risk for a sovereign government, its agencies and guaranteed

entities. For further information on how the Group identifies, monitors and manages country risk exposure

refer to page 21 of the strategic report of the consolidated financial statements for the year ended 31

December 2018.

The Group’s sovereign exposures consist of financial instruments entered into with sovereign and local

governments. Its non-sovereign exposures primarily consist of exposures to corporations and financial

institutions. The table below shows the Group’s five largest non-UK country net exposures. Exposure to

other Morgan Stanley Group undertakings has been excluded from this table.



12


Credit risk (continued)

Country risk exposure (continued)

Five largest non-UK country risk net exposures:

in $ millions

Country

Net

inventory(1)

Net

counterparty

exposure(2)

Funded

lending

Unfunded

commitments

Exposure

before

hedges Hedges(3)

Net

exposure

United States

Sovereigns 1,565 146 - - 1,711 - 1,711

Non-sovereigns 1,568 1,527 25 596 3,716 (130) 3,586

Total United States 3,133 1,673 25 596 5,427 (130) 5,297

France

Sovereigns (725) - - - (725) - (725)

Non-sovereigns (405) 2,197 25 1,096 2,913 (343) 2,570

Total France (1,130) 2,197 25 1,096 2,188 (343) 1,845

Italy

Sovereigns 618 (44) - - 574 39 613

Non-sovereigns 280 398 - 190 868 (85) 783

Total Italy 898 354 - 190 1,442 (46) 1,396

Germany

Sovereigns (1,004) 135 - - (869) (341) (1,210)

Non-sovereigns (115) 2,837 - 29 2,751 (244) 2,507

Total Germany (1,119) 2,972 - 29 1,882 (585) 1,297

Japan

Sovereigns 229 - - - 229 (37) 192

Non-sovereigns 88 990 - - 1,078 (21) 1,057

Total Japan 317 990 - - 1,307 (58) 1,249

(1) Net inventory represents exposure to both long and short single name and index positions (i.e. bonds and equities at fair value

and CDS based on notional amount assuming zero recovery adjusted for any fair value receivable or payable). As a market maker, the Group transacts in these CDS positions to facilitate client trading.

(2) Net counterparty exposure (i.e. repurchase transactions, securities lending and over-the-counter (“OTC”) derivatives) taking

into consideration legally enforceable master netting agreements and collateral.

(3) Represents CDS hedges (purchased and sold) on net counterparty exposure and funded lending executed by trading desks

responsible for hedging counterparty and lending credit risk exposures for the Group. Amounts are based on the CDS notional

amount assuming zero recovery adjusted for any fair value receivable or payable.

Note that overnight deposits the Group has with banks are excluded from the table above.



13


Liquidity and funding risk

Liquidity and funding risk refers to the risk that the Group will be unable to finance its operations due to a

loss of access to the capital markets or difficulty in liquidating its assets. Liquidity and funding risk also

encompasses the Group’s ability (or perceived ability) to meet its financial obligations without

experiencing significant business disruption or reputational damage that may threaten its viability as a

going concern. Liquidity risk also encompasses the associated funding risks triggered by the market or

idiosyncratic stress events that may cause unexpected changes in funding needs or an inability to raise new

funding. Generally, the Group incurs liquidity and funding risk as a result of its trading, investing and client

facilitation activities.

For a further discussion on the Group’s liquidity risk refer to page 23 of the strategic report in the

consolidated financial statements for the year ended 31 December 2018.

Operational risk

Operational risk refers to the risk of loss, or damage to the Group’s reputation, resulting from inadequate or

failed processes or systems, from human factors or from external events (e.g. fraud, theft, legal and

compliance risks, cyber-attacks or damage to physical assets). Operational risk relates to the following risk

event categories as defined by Basel Capital Standards: internal fraud; external fraud; employment

practices and workplace safety; clients, products and business practices; business disruption and system

failure; damage to physical assets; and execution, delivery and process management. The Group may incur

operational risk across the full scope of its business activities. Legal and compliance risk is included in the

scope of operational risk.

For further information on the Group’s operational risk including conduct risk and legal, regulatory and

compliance risk, refer to the pages 23 to 26 of the strategic report in the consolidated financial statements

for the year ended 31 December 2018.



14

LIQUIDITY AND CAPITAL RESOURCE MANAGEMENT AND REGULATION

Regulatory liquidity framework

The Basel Committee has developed two standards intended for use in liquidity risk supervision: the

Liquidity Coverage Ratio (“LCR”) and the Net Stable Funding Ratio (“NSFR”).

The LCR was developed to ensure banking organisations have sufficient high quality liquid assets to cover

net cash outflows arising from significant stress over 30 calendar days. The standard’s objective is to

promote the short-term resilience of the liquidity risk profile of banking organisations. The Group is in

compliance with the minimum LCR requirement of 100% as detailed in the LCR Delegated Act adopted by

the European Commission.

The objective of the NSFR is to reduce funding risk over a one year horizon by requiring banking

organisations to fund their activities with sufficiently stable sources of funding to mitigate the risk of future

funding stress. In June 2019, as part of the European Commission’s published amendment to the CRR, the

final NSFR rules come into effect from 28 June 2021. The Group continues to evaluate the NSFR

requirements and expects to be compliant when it becomes effective.

Capital management

The Group views capital as an important source of financial strength. It actively manages and monitors its

capital in line with established policies and procedures and in compliance with local regulatory

requirements.

In line with Morgan Stanley Group’s capital management policies, the Group manages its capital position

based upon, among other things, business opportunities, risks, capital availability and rates of return

together with internal capital policies, regulatory requirements and rating agency guidelines. Therefore, in

the future it may adjust its capital base in reaction to the changing needs of its businesses. The appropriate

level of capital is determined at a legal entity level to safeguard that entity’s ability to continue as a going

concern and ensure that it meets all regulatory capital requirements. The key components of the capital

management framework used by the Group are set out in the MSI Group’s Capital Planning and

Management Policy and include a point in time risk and leverage based capital assessment, forward-

looking capital projections and stress testing.

The MSI Group conducts an Internal Capital Adequacy Assessment Process (“ICAAP”) at least annually in

order to meet its obligations under CRDIV and the requirements of the PRA. The ICAAP is one of the key

tools used to inform the MSI Group’s capital adequacy assessment, planning and management. The MSI

Group ICAAP:

Is designed to ensure that the risks to which the MSI Group is exposed are appropriately

capitalised and risk managed, including those risks that are not captured, or not fully captured,

under Pillar 1;

Uses stress testing to size a capital buffer aimed at ensuring the MSI Group will continue to

operate above regulatory requirements under a range of severe but plausible stress scenarios; and

Assesses capital adequacy under normal and stressed operating environments over the 3-year

capital planning horizon to ensure the MSI Group maintains a capital position in line with internal

pre- and post-stress minimum levels.

The key elements of the ICAAP are embedded in the MSI Group’s day-to-day management processes and

decision-making culture.

The PRA reviews the ICAAP through its Supervisory Review and Evaluation Process (“SREP”) and sets a

Total Capital Requirement (“TCR”) which establishes the minimum level of regulatory capital for the MSI

Group. As of 30 June 2019 the MSIP TCR was set at 11.3%. If required, the PRA sets a buffer in addition

to the Basel Combined Buffers.

The Company’s capital is managed to ensure risk and leverage based requirements assessed through the

ICAAP and SREP are met. Internal capital ratio minima are set to ensure the Company has sufficient

capital to meet their regulatory requirements at all times.



15

LIQUIDITY AND CAPITAL RESOURCE MANAGEMENT AND REGULATION (CONTINUED)

Capital management (continued)

The capital managed by the Company broadly includes share capital, Additional Tier 1 capital instruments,

subordinated debt, senior subordinated debt and reserves. To maintain or adjust its capital structure, the

Company may pay dividends, return capital to its shareholder, issue new shares, issue or repay

subordinated debt or Additional Tier 1.

Regulatory capital framework

The Group continues to manage its capital position to ensure adequate resources are available to support its

activities, to enable it to withstand market stresses, and to meet regulatory stress testing requirements

proposed by its regulators.

The Company is regulated by the FCA and the PRA and, as such, is subject to minimum capital

requirements. The Company’s capital is monitored on an ongoing basis to ensure compliance with these

requirements. At a minimum, the Company must ensure that Capital Resources described in accordance

with CRR as Own Funds, are greater than the Total Capital Requirement.

The Company complied with all of its regulatory capital requirements during the period.

Own Funds

Set out below are details of the Company’s Capital Resources, described in accordance with CRR and

tables below as Own Funds, as at 30 June 2019 and 31 December 2018:

in $ millions 30 June 2019 31 December 2018

Common Equity Tier 1 ("CET 1") 15,113 15,648

Additional Tier 1 3,500 3,500

Tier 1 Capital 18,613 19,148

Tier 2 Capital 5,000 5,000

Total Own Funds 23,613 24,148

RWAs 126,670 124,950

CET1 Ratio 11.9% 12.5%

Tier 1 Capital Ratio 14.7% 15.3%

Total Capital Ratio 18.6% 19.3%

CET1 decreased by $535 million in the period, primarily as a result of dividends paid of $650 million.

Leverage ratio framework

The Basel III framework introduced a simple, transparent, non-risk based leverage ratio to act as a credible

supplementary measure to the risk-based capital requirements. The Basel Committee is of the view that a

simple leverage ratio framework is critical and complementary to the risk-based capital framework and that

a credible leverage ratio is one that ensures broad and adequate capture of both the on- and off-balance

sheet sources of banks’ leverage.



16


Regulatory capital framework (continued)

Leverage ratio framework (continued)

Although there is no current binding leverage requirement under CRD IV, the MSI Group manages its risk

of excessive leverage through the application of Business Unit leverage exposure limits and leverage ratio

early warning trigger levels. Limits are calibrated in line with legal entity capacity and ensure that leverage

exposure remains within the MSI Board’s risk appetite. MSI Group and the Company’s leverage exposures

are calculated monthly and weekly, respectively, and reported to the Europe, Middle East and Africa

(“EMEA”) Asset and Liability Committee (“ALCO”) who monitor these, as well as maturity mismatches

and Asset Encumbrance metrics, to ensure that any excessive risk is highlighted, assessed and mitigated

appropriately. The Company’s leverage ratio is detailed in the table below:


Tier 1 Capital 18,613 19,148

Leverage Exposure 445,514 417,315

Leverage Ratio 4.2% 4.6%

The decrease was driven by an increase in on-balance sheet exposure and a decrease in Tier 1 Capital. In

June 2019, as part of the European Commission’s published amendment to the CRR, the Group will be

subject to a binding leverage ratio of 3% from 28 June 2021.

Minimum Requirement for own funds and Eligible Liabilities (“MREL”) and Total Loss Absorbing

Capacity (“TLAC”)

In June 2018, the Bank of England, as the UK resolution authority, set MREL for all institutions on both an

individual and group consolidation basis, in line with the EU Bank Recovery and Resolution Directive

(“BRRD”). MREL serves to ensure that the Group has sufficient eligible liabilities in a bail-in scenario to

absorb losses and safeguard existing capital requirements. MREL requirements were effective from 1

January 2019. In 2018 the Group issued a $6,000 million senior subordinated loan, to ensure compliance

with the regulations.

In June 2019, the European Commission published final rules for TLAC requirements as part of their

amendments to the CRR. The rules apply at the Group level only and are effective from 27 June 2019. The

$6,000 million senior subordinated loan referred to above meets the Group’s TLAC requirements.

Credit ratings

The Company relies on external sources to finance a significant portion of its daily operations. The cost and

availability of financing generally are impacted by the Company’s credit ratings, among other variables. In

addition, the Company’s credit ratings can have an impact on certain trading revenues, particularly in those

businesses where longer-term counterparty performance is a key consideration, such as OTC derivative

transactions, including credit derivatives and interest rate swaps. When determining credit ratings, ratings

agencies consider company-specific factors, other industry factors such as regulatory or legislative changes,

and the macroeconomic environment, among other things. Some rating agencies have stated that they

currently incorporate various degrees of credit rating uplift from non-governmental third party sources of

potential support.

At 30 June 2019, the Company’s senior unsecured ratings were as follows, unchanged from 31 December

2018:

Short- Term Long- Term Rating

Debt Debt Outlook

Moody's Investors Service, Inc ("Moody's") P-1 A1 Stable

Standard & Poor's Rating Service ("S&P") A-1 A+ Stable



17


Credit ratings (continued)

Collateral impact of a downgrade

The Company is a participant in global derivatives markets. In some cases, the derivative counterparties

have contractual rights that require the Company to post collateral to them in the event that credit rating

agencies downgrade the Company’s credit rating.

In measuring collateral call risks, all amounts of collateral that the Company could be required to post in

accordance with the terms and conditions of the downgrade trigger clauses found in applicable legal

agreements, are considered.

The additional collateral or termination payments that may be called in the event of a future credit rating

downgrade vary by contract and can be based on ratings by either or both of Moody’s and S&P. As at 30

June 2019, the future potential collateral amounts and termination payments that could be called or required

by counterparties or exchanges and clearing organisations in the event of one-notch or two-notch

downgrade scenarios (from the lowest of Moody’s or S&P ratings), based on the relevant contractual

downgrade triggers, were $115 million and an incremental $258 million, respectively.

The impact of potential collateral calls related to the derivative exposures is inherently uncertain and would

depend on a number of interrelated factors, including, among others, the magnitude of a downgrade, the

rating relative to peers, the rating assigned by the relevant agency pre-downgrade, individual client

behavior and future mitigating actions that could be taken. The Company manages the risk of potential

collateral calls on its derivative positions by employing a variety of risk-mitigation strategies, including

modelling the impact of credit rating agency downgrades in the liquidity stress test program, monitoring

historical changes in variation margin, diversifying risk exposures, hedging, managing counterparty and

product risk limits and maintaining the liquidity reserve to enable the Company to meet unexpected

collateral calls or other potentially-adverse developments.

Regulatory development

Financial risks from climate change

In April 2019, the PRA issued a supervisory statement on enhancing banks’ and insurers’ approaches to

managing financial risks from climate change. The Group is considering the impact of this statement on its

longer term strategy and how it manages the financial risks of climate change in line with its risk

management framework.

Basel Committee on Banking Supervision (“BCBS”) - finalising Basel III reforms

In December 2017, the BCBS released the final part of its Basel III reform package. The key amendments

provide updates to the standardised measures for calculating capital requirements and include a RWA floor,

calculated as 72.5% of total standardised RWA.

In January 2019, the BCBS published its revised final standard on the minimum capital requirements for

market, also known as the Fundamental Review of the Trading Book (“FRTB”). The new regime:

Clarifies the boundary between the banking book and trading book;

Provides capital requirements for non-modellable risk factors;

Introduces an internal models approach that uses expected shortfall models; and

Establishes a more risk-sensitive standardised approach that acts as a fallback for the internal models

method

Given that the above proposals will need to be transposed into national/EU law, the timing and impact of

the final outcome remains uncertain.



18


Regulatory development (continued)

Amendments to the Capital Requirements Regulation

In June 2019, the European Commission published the final rules, known as CRD V and CRR II that

amend the existing prudential regime (CRD IV and CRR), and the BRRD.

The CRD V/CRR II package includes: TLAC, FRTB, Standardised approach to counterparty credit risk

(“SA-CCR”), NSFR, revised Leverage Ratio, revised Large Exposures framework, Intermediate Parent

Undertaking (“IPU”) requirement, and revised Pillar 3 disclosure requirements.

Final rules are effective 27 June 2019; however, implementation dates are staggered over a four year

period, with TLAC applying from 27 June 2019 and the majority of new requirements applying from 28

June 2021.

OTHER REGULATORY MATTERS

Resolution and recovery planning

Both the Morgan Stanley Group and the MSI Group prepare, on an annual basis, a recovery plan which

identifies mitigation tools available to both groups in times of severe stress.

The Morgan Stanley Group has developed a resolution plan in accordance with the requirements of Section

165(d) of Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act and its

implementation regulations adopted by the Federal Reserve Board and the Federal Deposit Insurance

Corporation. The resolution plan presents the Firm’s strategy for resolution of the Firm upon material

financial distress or failure. The Company is a Material Operating Entity of the Morgan Stanley Group and

is within the scope of the single point of entry resolution strategy adopted by the Morgan Stanley Group.

The BRRD has established a recovery and resolution framework for EU credit institutions and investment

firms, including the Company. The Company produces information required by the UK Resolution

Authority in the form of a resolution pack and ad hoc regulatory submissions, as necessary under BRRD

and UK regulatory requirements.

Expected replacement of London Interbank Offered Rate (“LIBOR”)

Central banks around the world, including the Federal Reserve, the Bank of England, and the European

Central Bank, have commissioned committees and working groups of market participants and official

sector representatives with the goal of finding suitable replacements for LIBOR and replacements or

reforms of other interest rate benchmarks, such as the Euro Interbank Offered Rate (“EURIBOR”) and Euro

Overnight Index Average (“EONIA”) (collectively, the “IBORs”). During the second quarter of 2019, the

Morgan Stanley Group issued floating rate debt using the Secured Overnight Financing Rate (“SOFR”),

which is the alternative rate to US dollar LIBOR selected by the Alternative Reference Rates Committee

convened by the Federal Reserve Board and the Federal Reserve Bank of New York.

The Morgan Stanley Group’s transition plan includes a number of key steps, including continued

engagement with central banks and industry working groups and regulators (including participation and

leadership on key committees), active client engagement, internal operational readiness, and risk

management, among other things, to promote the transition to alternative reference rates. We have

established a firm-wide initiative to identify, assess and monitor risks associated with the expected

discontinuation or unavailability of IBORs and/or reform of interest rate benchmarks. This includes taking

steps to update operational processes (including to support alternative reference rates) and models, as well

as evaluating legacy contracts for any changes that may be required, including the determination of

applicable fallbacks.



19

OTHER REGULATORY MATTERS (CONTINUED)

Companies Regulations

Issued in July 2018, The Companies (Miscellaneous Reporting) Regulations 2018 introduced a number of

new reporting requirements aimed at enhancing corporate governance reporting within the annual financial

statements of certain larger UK companies, including MSIP. The new Regulations are effective for

financial years beginning on or after 1 January 2019 and will require MSIP to provide a statement of

corporate governance arrangements including which governance code has been applied, if any (or what

other arrangements are in place); how the chosen code was applied; and any departures from it, as well as

disclosure explaining how the Directors have fulfilled their duty under s172 (1) of the UK Companies Act

to promote the success of the company and a statement on engagement with suppliers, customers and

employees.

Impact of withdrawal from the EU

The Group is currently subject to EU regulatory requirements based on the implementation of EU

directives by the UK and through EU regulations that apply directly. As a result of the UK’s decision to

leave the EU (Brexit), there is uncertainty around what EU regulatory requirements will continue to apply

in the UK. EU regulatory requirements in effect at the withdrawal date may continue to apply to the Group

directly. Alternatively, the UK may implement equivalent standards for a period of time, including

introducing equivalent standards for evolving regulation being introduced by the EU that would apply to

the Group. This may include additional proposals made by the Basel Committee in its Basel III reform

package.

GOING CONCERN

Business risks associated with the uncertain market and economic conditions are being actively monitored

and managed by the Group. Retaining sufficient liquidity and capital to withstand these market pressures

remains central to the Group’s strategy. In particular, the Group’s capital and liquidity is deemed sufficient

to exceed regulatory minimums under both a normal and in a stressed market environment, including

potential Brexit stresses, for the foreseeable future. The specific impact of Brexit on the business of the

Group has also been considered as part of the going concern analysis. Additionally, the Group has access to

further Morgan Stanley Group capital and liquidity.

Taking all of these factors into consideration, the Directors believe it is reasonable to assume that the Group

will have access to adequate resources to continue in operational existence for the foreseeable future.

Accordingly they continue to adopt the going concern basis in preparing the interim management reports

and Interim Financial Statements.

Approved by the Board and signed on its behalf by

K Lazaroo

Director

26 September 2019


DIRECTORS’ RESPONSIBILITY STATEMENT

20

The Directors, the names of whom are set out below, confirm that to the best of their knowledge:

(a) the condensed set of interim financial statements has been prepared in accordance with International

Accounting Standard (“IAS”) 34 ‘Interim Financial Reporting’ as adopted by the EU, give a true and

fair view of the assets, liabilities, financial position and result of the Group; and

(b) the interim management report includes a fair review of the information required by DTR4.2.7R of the

Disclosure and Transparency Rules, being an indication of the important events that have occurred

during the period and their impact on the condensed set of interim financial statements, and a

description of the principal risks and uncertainties for the remaining six months of the financial year.

By order of the Board on 26 September 2019

K Lazaroo

Director

Board of Directors:

S Ball (appointed 28 February 2019)

J Bloomer (Chairman)

D O Cannon

C Castello (resigned 31 January 2019)

T Duhon

L Guy

J Horder

A Kohli

K Lazaroo (appointed 22 February 2019)

M C Phibbs

D A Russell

N P Whyte

C Woodman

INDEPENDENT REVIEW REPORT TO MORGAN STANLEY & CO.

INTERNATIONAL plc

21

We have been engaged by the Company to review the condensed set of financial statements in the half-

yearly financial report for the six month period ended 30 June 2019 which comprises the condensed

consolidated income statement, the condensed consolidated statement of comprehensive income, the

condensed consolidated statement of changes in equity, the condensed consolidated statement of financial

position, the condensed consolidated statement of cash flows and related notes 1 to 19. We have read the

other information contained in the half-yearly financial report and considered whether it contains any

apparent misstatements or material inconsistencies with the information in the condensed set of financial

statements.

This report is made solely to the Company in accordance with International Standard on Review

Engagements (UK and Ireland) 2410, “Review of Interim Financial Information Performed by the

Independent Auditor of the Entity” issued by the Financial Reporting Council. Our work has been

undertaken so that we might state to the Company those matters we are required to state to them in an

independent review report and for no other purpose. To the fullest extent permitted by law, we do not

accept or assume responsibility to anyone other than the Company, for our review work, for this report, or

for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The

Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure

and Transparency Rules of the United Kingdom’s Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with

International Financial Reporting Standards (“IFRSs”) as adopted by the European Union. The condensed

set of interim financial statements included in this half-yearly financial report has been prepared in

accordance with International Accounting Standard 34 “Interim Financial Reporting”, as adopted by the

European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of interim financial

statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and

Ireland) 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the

Entity” issued by the Financial Reporting Council for use in the United Kingdom. A review of interim

financial information consists of making inquiries, primarily of persons responsible for financial and

accounting matters, and applying analytical procedures and other review procedures. A review is

substantially less in scope than an audit conducted in accordance with International Standards on Auditing

(UK) and consequently does not enable us to obtain assurance that we would become aware of all

significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of

financial statements in the half-yearly financial report for the six month period ended 30 June 2019 is not

prepared, in all material aspects, in accordance with International Accounting Standard 34 as adopted by

the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom’s

Financial Conduct Authority.

Deloitte LLP

Statutory Auditor

London, United Kingdom

26 September 2019


CONDENSED CONSOLIDATED INCOME STATEMENT

Six months ended 30 June 2019

22

Six months Six months

ended ended

in $ millions 30 June 2019 30 June 2018

restated

Note (unaudited) (unaudited)

Net trading income 3,000 2,945

Net income from other financial instruments held at fair value (472) 150

Fee and commission income 2 1,046 1,294

Other revenue 51 15

Interest income 4 1,063 472

Interest expense 4 (1,864) (1,433)

Net interest income (801) (961)

Net revenue 2,824 3,443

Net loss on investments in subsidiaries, associates and joint

ventures 9 (6) -

Non-interest expenses:

Operating expenses 3 (2,316) (2,468)

Net impairment loss on financial assets (12) (5)

PROFIT BEFORE TAX 490 970

Income tax expense 5 (129) (286)

PROFIT FOR THE PERIOD 361 684

All operations were continuing in the current and prior periods.

The notes on pages 28 to 65 form an integral part of the Interim Financial Statements.


CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE

INCOME


23


ended ended


restated

(unaudited) (unaudited)

PROFIT FOR THE PERIOD 361 684

OTHER COMPREHENSIVE INCOME, NET OF TAX

Items that will not be reclassified subsequently to profit or

loss:

Remeasurement of net defined benefit liability 1 (1)

Changes in fair value attributable to own credit risk on

xxfinancial liabilities designated at fair value (118) 94

Items that may be reclassified subsequently to profit or

loss:

Currency translation reserve:

Foreign currency translation differences arising on foreign

operations during the period (14) (36)

Net amount reclassified to consolidated income statement upon

xxtransfer of subsidiary 6 -

OTHER COMPREHENSIVE INCOME AFTER INCOME

TAX (125) 57

TOTAL COMPREHENSIVE INCOME 236 741

Attributable to:

Owners of the parent 236 743

Non-controlling interests - (2)

TOTAL COMPREHENSIVE INCOME 236 741



CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


24

Debt

in $ millions Share Currency Capital Capital valuation Attributable Non-

Equity premium translation contribution redemption Pension adjustment Retained to owners of controlling Total

Note instruments account reserve reserve reserve reserve reserve earnings the parent interest equity

Balance at

1 January 2019

15,965 513 109 3 1,400 (1) 53 3,018 21,060 57 21,117

Profit for the period

- - - - - - - 361 361 - 361

Other comprehensive

income for the period:

Remeasurement of

defined benefit liability

- - - - - 1 - - 1 - 1

Changes in fair value

attributable to own credit

risk on financial

liabilities designated at

fair value

- - - - - - (118) - (118) - (118)

Foreign currency

translation differences

arising on foreign

operations

- - (14) - - - - - (14) - (14)

Recycling of currency

translation reserve upon

disposal of subsidiary

- - 6 - - - - - 6 - 6

Total comprehensive

income

- - (8) - - 1 (118) 361 236 - 236

Transactions with

owners:

Dividends 12 - - - - - - - (650) (650) - (650)

Difference recognised in

equity upon dividend in

specie of MSESE Group 9 - - - - - - - 7 7 - 7

Balance at

30 June 2019

(unaudited)

15,965 513 101 3 1,400 - (65) 2,736 20,653 57 20,710


CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


25

Debt

in $ millions Share Currency Available- Capital Capital valuation Attributable Non-

Equity premium translation for-sale contribution redemption Pension adjustment Retained to owners of controlling Total

instruments account reserve reserve reserve reserve reserve reserve earnings the parent interest equity

Balance at

1 January 2018 13,765 513 98 63 3 1,400 - (118) 2,904 18,628 59 18,687

Impact of change in

accounting policy for

fair value gains and

losses on inception - - - - - - - - 37 37 - 37

Impact of adoption of

new accounting

standards - - - (63) - - - - 67 4 - 4

Profit for the period - - - - - - - - 662 662 - 662

Prior period impact of

IAS 12 amendment - - - - - - - - 22 22 - 22

Other

comprehensive income

for the period:

Remeasurement of

defined benefit liability - - - - - - (1) - - (1) - (1)

Change in fair value

attributable to own credit

risk on financial

liabilities designated at

fair value - - - - - - - 94 - 94 - 94

Foreign currency

translation differences

arising on foreign

operations - - (34) - - - - - - (34) (2) (36)

Total

comprehensive income - - (34) - - - (1) 94 684 743 (2) 741

Transactions with

owners:

Dividends - - - - - - - - (87) (87) - (87)

Prior period impact of

IAS 12 amendment - - - - - - - - (32) (32) - (32)

Balance at

30 June 2018 restated

(unaudited) 13,765 513 64 - 3 1,400 (1) (24) 3,573 19,293 57 19,350


MORGAN STANLEY & CO. INTERNATIONAL plc Registered Number: 02068222

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2019

26


Note (unaudited)

ASSETS

Cash and short term deposits 33,258 30,829

Trading financial assets (of which $41,977 million (2018:

$38,499 million) were pledged to various parties) 7 292,083 253,188

Secured financing 6 94,788 95,643

Loans and advances 200 836

Investment securities 137 132

Trade and other receivables 67,830 65,197

Current tax assets 259 350

Deferred tax assets 25 5

Property, plant and equipment 17 10

Other assets 13 9

TOTAL ASSETS 488,610 446,199

LIABILITIES AND EQUITY

Bank loans and overdrafts 3 4

Trading financial liabilities 7 248,792 217,093

Secured borrowing 6 81,112 78,927

Trade and other payables 88,931 91,758

Debt and other borrowings 48,937 37,115

Provisions 3 3

Current tax liabilities 47 55

Deferred tax liabilities - 33

Accruals and deferred income 69 87

Post employment benefit obligations 6 7

TOTAL LIABILITIES 467,900 425,082

EQUITY

Share capital 15,965 15,965

Share premium account 513 513

Currency translation reserve 101 109

Capital contribution reserve 3 3

Capital redemption reserve 1,400 1,400

Pension reserve - (1)

Debt valuation adjustment reserve (65) 53

Retained earnings 2,736 3,018

Equity attributable to owners of the parent 20,653 21,060

Non-controlling interest 57 57

TOTAL EQUITY 20,710 21,117

TOTAL LIABILITIES AND EQUITY 488,610 446,199



CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

As at 30 June 2019

27


ended ended


Note (unaudited) (unaudited)

NET CASH FLOWS FROM OPERATING ACTIVITIES 3,195 8,660

INVESTING ACTIVITIES

Transfer of subsidiary (456) -

NET CASH FLOWS USED IN INVESTING ACTIVITIES (456) -

FINANCING ACTIVITIES

Dividends paid 12 (119) (119)

Repayment of subordinated loans - (2,000)

Interest paid on subordinated loan liabilities - (26)

Interest paid on senior subordinated loan liabilities (120) -

NET CASH FLOWS USED IN FINANCING ACTIVITIES (239) (2,145)

NET INCREASE IN CASH AND CASH EQUIVALENTS 2,500 6,515

Currency translation differences on foreign currency cash balances (71) 681

CASH AND CASH EQUIVALENTS AT THE BEGINNING

OF THE PERIOD 30,829 25,338

CASH AND CASH EQUIVALENTS AT THE END OF THE

PERIOD 33,258 32,534



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


28

1. BASIS OF PREPARATION

a. General information

These Interim Financial Statements do not constitute statutory accounts within the meaning of Section 435

of the United Kingdom Companies Act 2006 (“Companies Act”).

Statutory accounts for the year ended 31 December 2018 were approved by the Board of Directors on 18

April 2019 and delivered to the Registrar of Companies. The auditor’s report on those accounts was not

qualified, did not include a reference to any matters to which the auditors drew attention by way of

emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the

Companies Act 2016. Other comparative information for the six months ended 30 June 2018 is included in

certain instances.

b. Accounting policies

The Group has prepared its annual consolidated financial statements in accordance with IFRSs issued by

the International Accounting Standards Board (“IASB”) as adopted by the EU, Interpretations issued by the

IFRS Interpretations Committee (“IFRIC”) and the Companies Act 2006. The Interim Financial Statements

have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conducts

Authority and in accordance with IAS 34 ‘Interim Financial Reporting’, as adopted by the EU.

In preparing these Interim Financial Statements the Group has applied consistently the accounting policies

and methods of computation used in the Group’s annual consolidated financial statements for the year

ended 31 December 2018, except where noted below in the ‘New standards and interpretations adopted

during the period’.

New standards and interpretations adopted during the period

The following standards, amendments to standards and interpretation relevant to the Group’s operations

were adopted during the period and did not have a material impact on the Group’s condensed consolidated

financial statements.

IFRS 16 ‘Leases’ was issued by the IASB in January 2016. The standard was endorsed by the EU in

November 2017. The Group adopted this standard using the modified retrospective method of adoption,

which resulted in the recognition of additional right of use (“ROU”) assets and lease liabilities for leases

existing at, or entered into after 1 January 2019 which were previously accounted for as operating leases

under IAS 17 ‘Leases’. Comparative amounts have not been restated and there was no resultant cumulative

effect adjustment arising on adoption of the standard.

An amendment to IAS 19 ‘Plan Amendment, Curtailment or Settlement’ was issued by the IASB in

February 2018, for retrospective application to plan amendments, curtailments or settlements occurring on

or after 1 January 2019. The amendment was endorsed by the EU in March 2019.

As part of the 2015-2017 Annual Improvements Cycle published in December 2017, the IASB made

amendments to the following standards that are relevant to the Group’s operations: IAS 12 ‘Income Taxes’

and IAS 23 ‘Borrowing Costs’, for application in accounting periods beginning on or after 1 January 2019.

The amendment to IAS 12 has changed the presentation of the tax benefit relating to coupon payments on

the Additional Tier 1 capital instruments, which are now presented within ‘Income tax expense’ in the

condensed consolidated income statement rather than in the condensed consolidated statement of changes

in equity. The amendments were endorsed by the EU in March 2019. Refer to note 1(d) for further detail.

IFRIC 23 ‘Uncertainty over Income Tax Treatments’ was issued by the IASB in June 2017 for application

in accounting periods beginning on or after 1 January 2019. The interpretation was endorsed by the EU in

October 2018. Implementation of the interpretation had no impact on the results of the Group.




29

1. BASIS OF PREPARATION (CONTINUED)

New standards and interpretations not yet adopted

At the date of authorisation of these condensed consolidated financial statements, the following

amendments to standards relevant to the Group’s operations were issued by the IASB but not mandatory for

accounting periods beginning 1 January 2019. The Group does not expect that the adoption of the following

amendments to standards will have a material impact on the Group’s condensed consolidated financial

statements.

Amendments to IAS 1 ‘Presentation of Financial Statements’ and IAS 8 ‘Accounting Policies, Changes in

Accounting Estimates and Errors’ were issued by the IASB in October 2018, for application in accounting

periods beginning on or after 1 January 2020.

c. Critical accounting judgements and sources of estimation uncertainty

In preparing the condensed consolidated financial statements, the Group makes judgements and estimates

that affect the application of accounting policies and reported amounts.

Critical accounting judgements are key decisions made by management in the application of the Group’s

accounting policies, other than those involving estimations, which have the most significant effects on the

amounts recognised in the financial statements. Critical accounting estimates represent assumptions and

estimations made by management that have a significant risk of resulting in a material adjustment to the

carrying amount of assets and liabilities within the next financial year.

The critical judgements in applying the Group’s accounting policies relate to recognition and measurement

of tax balances and consolidation of structured entities. For further detail on recognition and measurement

of tax balances refer to accounting policy note 3(n) and note 21 of the consolidated financial statements for

the year ended 31 December 2018. For further detail on consolidation of structured entities refer to note 16

of the consolidated financial statements for the year ended 31 December 2018.

The critical sources of estimation uncertainty relate to the valuation of Level 3 financial instruments and

measurement of property, litigation and taxation provisions. For further detail refer to accounting policy

note 3(p) of the consolidated financial statements for the year ended 31 December 2018.

The Group evaluates the critical accounting judgements and accounting estimates on an ongoing basis and

believes that these are reasonable.

d. Change in accounting policy arising from IAS 12 amendment

As noted in note 1(b), an amendment to IAS 12 for application in accounting periods beginning on or after

1 January 2019 has been adopted by the Group and affects the presentation of the tax benefit relating to

dividend payments on the Group’s AT1 capital instruments. Previously the Group recognised the tax

benefit of such coupon payments directly in ‘Retained earnings’. Following adoption of the amendment,

this benefit is reflected within ‘Income tax expense’ in the condensed consolidated income statement.




30

1. BASIS OF PREPARATION (CONTINUED)

d. Change in accounting policy arising from IAS 12 amendment (continued)

As required by the IAS 12 amendment, the income tax consequences of dividends recognised on or after

the beginning of the earliest comparative period have been presented in ‘Income tax expense’, rather than

directly in ‘Retained earnings’. The impact of this amendment is as follows:


CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Liabilities:

Current tax liabilities 10 -

Equity:

Retained earnings (10) -

INCOME STATEMENT

Profit and loss:

Income tax expense 22 32

2. FEE AND COMMISSION INCOME


Trust and other fiduciary activities 82 85

Investment banking 510 632

Other fee and commission income 362 453

Other 92 124

Total fee and commission income 1,046 1,294

Of which, revenue with contracts with customers 1,083 1,356

Total fee and commission income is stated after the transfer of revenues totalling $37 million (2018: $62

million) to other Morgan Stanley Group undertakings. These transfers do not relate to revenue from

contracts with customers.

Revenue from contracts with customers

The following table presents revenues in the current period.

in $ millions Current contract revenues

30 June 2019 30 June 2018

Investment banking(1)

549 695

Trust and other fiduciary activities 82 85

Commission income 360 453

Other revenue from contracts with customers 92 123

Total revenue from contracts with customers 1,083 1,356

(1) Includes advisory and underwriting revenues.




31

3. OPERATING EXPENSES


Direct staff costs 46 73

Management charges from other Morgan Stanley Group undertakings

relating to staff costs 850 963

Staff related expenses 896 1,036

Management charges from other Morgan Stanley Group undertakings

relating to other services 656 554

Brokerage fees 304 352

Administration and corporate services 49 48

Professional services 70 73

Other taxes 287 334

Other 54 71

Non-staff related expenses 1,420 1,432

Total operating expenses 2,316 2,468

The Group employs staff directly and also utilises the services of staff who are employed by other Morgan

Stanley Group undertakings.

Staff-related expenses decreased by 14% from $1,036 million to $896 million for the period. The decrease

was primarily driven by lower discretionary compensation as a result of lower Institutional Group revenues

and from the transfer of the Group’s investment in MS France Group to MSIUK on 1 November 2018.

Direct staff costs of $36 million relating to the MS France Group were recognised in the Group’s expenses

for the prior year period.

Non-staff related expenses decreased by 1% from $1,432 million to $1,420 million for the period. This

decrease was driven primarily by lower volume-related expenses including brokerage and transaction taxes

a result of reduced client activity. This is partially offset by an increase in management charges from other

Morgan Stanley Group undertakings relating to other services.

4. INTEREST INCOME AND INTEREST EXPENSE

The table below presents interest income and expense by accounting classification. Interest income and

expense is calculated using the effective interest rate method for financial assets and financial liabilities

measured at amortised cost.

30 June 2019 30 June 2018

Financial assets measured at amortised cost 785 580

Trading financial assets 102 44

Non-trading financial assets at FVPL 176 (152)

Financial assets measured at FVPL 278 (108)

Total interest income 1,063 472

Financial liabilities measured at amortised cost 1,713 1,514

Financial liabilities designated at FVPL 151 (81)

Total interest expense 1,864 1,433




32

5. INCOME TAX EXPENSE

The Group’s tax expense has been accrued based on the expected tax rate that takes into account current

expectations concerning the allocation of group relief within the Morgan Stanley UK tax group and

prevailing tax rates in the jurisdictions in which the Group operates.

The UK Bank Levy (the “Levy”) is an annual charge on a bank’s balance sheet. It is applied to chargeable

liabilities and equity of the Group and other Morgan Stanley UK tax-resident entities and their overseas

subsidiaries. Under IFRIC 21, ‘Levies’ the Levy is not recognised in the Interim Financial Statements since

the Levy’s obligating event has not yet arisen. However, for the purposes of calculating the effective tax

rate in accordance with IAS 34, an adjustment has been made for the forecast Levy (since it is non-

deductible for UK corporation tax purposes). As such, the Levy impacts the annual effective tax rate and

the tax expense for the six months ended 30 June 2019.

Finance (No.2) Act 2015 enacted reductions in the rate at which the Levy is applied from 0.21% to 0.10%

over the period 2016-2021. The forecast Levy for 2019 is lower than 2018 due to a decrease in the

estimated chargeable liability and a reduction in the rate applied.

The Group’s forecast tax rate is sensitive to the non-deductibility of certain expenses (including the Levy

forecast) for tax purposes, the geographic mix of profits and tax rates in non-UK jurisdictions and the

additional 8% UK Banking Surcharge. In addition, following the amendment to IAS 12 (see note 1(d)), the

presentation of the tax benefit relating to the coupon payments on the Additional Tier 1 capital instruments

reduces the forecast tax rate for the year.

During the period the UK statutory rate, excluding the 8% banking surcharge, was 19%. A further

reduction to 17% has been enacted and will be effective from 1 April 2020.

The Group’s effective tax rate for the six months ended 30 June 2019 is 26.3% (six months ended 30 June

2018 restated: 29.5%), which is lower than the standard rate of corporation tax (inclusive of the UK

Banking Surcharge) in the UK of 27%. The main reason for the lower effective tax rate is the income tax

benefit of the Additional Tier 1 coupon payments, partially offset by the non-deductibility of the UK Bank

Levy and the effect of taxes in foreign jurisdictions.




33

6. FINANCIAL ASSETS AND LIABILITIES BY MEASUREMENT CATEGORY

The following tables analyse financial assets and financial liabilities presented in the consolidated

statement of financial position by the IFRS 9 classifications of fair value through profit and loss (“FVPL”),

FVPL (designated), and amortised cost.

30 June 2019

in $ millions FVPL

FVPL

(designated)

Amortised

cost

Total

Cash and short term deposits - - 33,258 33,258

Trading financial assets 292,083 - - 292,083

Secured financing

Cash collateral on securities

borrowed 21,155 - -

21,155

Securities purchased under

agreements to resell 58,342 - -

58,342

Other secured financing 15,291 - - 15,291

Loans and advances 13 - 187 200

Investment securities 137 - - 137

Trade and other receivables 795 - 66,928

67,723

Total financial assets 387,816 - 100,373 488,189

Bank loans and overdrafts - - 3 3

Trading financial liabilities 248,792 - - 248,792

Secured borrowings - 37,403 43,709 81,112

Trade and other payables - 878 87,924

88,802

Debt and other borrowings - 7,015 41,922 48,937

Total financial liabilities 248,792 45,296 173,558 467,646




34

6. FINANCIAL ASSETS AND LIABILITIES BY MEASUREMENT CATEGORY (CONTINUED)

31 December 2018

in $ millions FVPL

FVPL

(designated)

Amortised

cost Total

Cash and short term deposits - - 30,829 30,829

Trading financial assets 253,188 - - 253,188

Secured financing:

Cash collateral on securities I

iiiiborrowed 23,122 - - 23,122


iiiiagreements to resell 64,872 - - 64,872

Other secured financing 7,649 - - 7,649

Loans and advances 11 - 825 836

Investment securities 132 - - 132

Trade and other receivables 780 - 64,314 65,094

Total financial assets 349,754 - 95,968 445,722

Bank loans and overdrafts - - 4 4

Trading financial liabilities 217,093 - - 217,093

Secured borrowings - 32,582 46,345 78,927

Trade and other payables - 897 90,636 91,533

Debt and other borrowings - 5,664 31,451 37,115

Total financial liabilities 217,093 39,143 168,436 424,672




35

7. TRADING FINANCIAL ASSETS AND LIABILITIES

in $ millions 30 June 2019

31 December 2018

Assets Liabilities Assets Liabilities

Government debt securities 20,572 19,774 14,775 17,935

Corporate and other debt 10,798 3,753 11,252 4,593

Corporate equities 57,566 23,988 47,850 20,452

Derivatives (see note 8) 203,147 201,277 179,311 174,113

292,083 248,792 253,188 217,093

8. DERIVATIVES

30 June 2019

in $ millions

Bilateral

OTC

Cleared

OTC

Listed

derivative

contracts Total

Derivative assets:

Interest rate contracts 75,979 3,239 2 79,220

Credit contracts 4,682 180 - 4,862

Foreign exchange and gold contracts 84,561 1,354 - 85,915

Equity contracts 24,109 - 6,575 30,684

Commodity contracts 2,431 - 35 2,466

191,762 4,773 6,612 203,147

Derivative liabilities:



Foreign exchange and gold contracts 83,446 1,505 4 84,955



191,030 3,619 6,628 201,277




36

8. DERIVATIVES (CONTINUED)

31 December 2018

in $ millions

Bilateral

OTC

Cleared

OTC

Listed

derivative

contracts Total

Derivative assets:






168,950 3,401 6,960 179,311

Derivative liabilities:

Interest rate contracts 58,372 848 9 59,229





164,143 2,247 7,723 174,113




37

9. INTEREST IN SUBSIDIARIES

Disposal of subsidiary

On 1 March 2019, the Company paid a dividend in specie of $531 million to MSIUK, thereby transferring

its equity interest in MSEHSE and MSESE.

The carrying value of the net assets of MSEHSE and MSESE at the date of transfer and at 31 December

2018 was as follows:

At date of 31 December

in $ millions transfer 2018

ASSETS

Cash and short term deposits 456 509

Trade and other receivables 145 20

Property plant and equipment 1 -

TOTAL ASSETS 602 529

LIABILITIES

Accruals and deferred income 1 1

Debt issued and other borrowings 77 -

TOTAL LIABILITIES 78 1

NET ASSETS 524 528

Dividend in specie 531

Difference recognised in equity upon dividend in specie of

MSEHSE and MSESE 7

Reclassification of Currency translation reserve

At the date of transfer, MSEHSE and MSESE had generated an accumulated ‘Currency translation reserve’

of $(6) million. Upon transfer out of the Group, this loss was reclassified to the condensed consolidated

income statement within ‘Net loss on investments in subsidiaries, associates and joint ventures’.




38

10. INTEREST IN STRUCTURED ENTITIES

The Group’s involvement with unconsolidated structured entities, including those of which it considers

itself the sponsor, is consistent with that described in the Group’s annual consolidated financial statements


Consolidated structured entities

As at 30 June 2019 and 31 December 2018, the Group did not consolidate any significant structured

entities.

Unconsolidated structured entities

The table below shows certain non-consolidated structured entities in which the Group had an interest at 30

June 2019 and 31 December 2018. The tables include all structured entities in which the Group has

determined that its maximum exposure to loss exceeds specific thresholds or meets certain other criteria.

The majority of the structured entities included in the tables below are sponsored by unrelated parties; the

Group’s involvement is generally the result of the Group’s secondary market-making activities.

The interests in non-consolidated structured entities held by the Group, and any related hedges, are

generally recognised in the condensed consolidated statement of financial position in trading financial

assets or trading financial liabilities – derivatives or liabilities - corporate and other debt, with changes in

fair value being recognised in net trading income.

The Group’s maximum exposure to loss shown in the table does not reflect the offsetting benefit of hedges,

including total return swaps in relation to fund investments and other entities or the benefit of collateral

held as part of a transaction with the structured entity or with any party to the structured entity.

The assets of the structured entities represent all assets of the structured entity and not just the portion

relating to the Group’s interests. Maximum exposure to loss represents the Group’s maximum exposure to

loss relating to its interest in the structured entity.




39

10. INTEREST IN STRUCTURED ENTITIES (CONTINUED)

Unconsolidated structured entities (continued)

Mortgage and

asset-backed Collateralised Fund

in $ millions securitisations debt obligation investments Other Total

30 June 2019

Assets of the structured entity 13,783 1,715 2,270 2,110 19,878

Maximum exposure to loss:

Debt and equity interests 231 170 2,185 1 2,587

Derivative and other contracts - - 85 2,107 2,192

Total maximum exposure to loss 231 170 2,270 2,108 4,779

Carrying value of interests -

assets:


Derivative and other contracts - - 45 105 150

Total carrying value of interests - assets 231 170 2,230 106 2,737 Carrying value of interests -

liabilities:

Debt and equity interests - - 1,902 - 1,902

Derivatives and other contracts - - 40 11 51

Total carrying value of interests -

liabilities - - 1,942 11 1,953

31 December 2018

Assets of the structured entity 3,698 6,660 2,153 1,577 14,088

Maximum exposure to loss:


Derivative and other contracts - - 117 1,575 1,692

Total maximum exposure to loss 341 207 2,153 1,576 4,277

Carrying value of interests -

assets:


Derivative and other contracts - - 54 13 67

Total carrying value of interests - assets 341 207 2,090 14 2,652

Carrying value of interests - liabilities:

Derivatives and other contracts - - 63 66 129

Total carrying value of interests -

liabilities - - 63 66 129




40

10. INTEREST IN STRUCTURED ENTITIES (CONTINUED)

Unconsolidated structured entities (continued)

Securitisation transactions generally involve structured entities. Primarily as a result of its secondary

market-making activities, the Group owned additional securities issued by securitisation structured entities

for which the maximum exposure to loss is less than the specific thresholds noted earlier. Details of the

type of securities retained in these cases are shown in the table below.


Securities backed by:

Residential mortgage loans 212 169

Commercial mortgage loans 5 7

CDOs or other CLOs 197 146

Other consumer loans 62 57

476 379

The Group’s primary risk exposure is to these securities owned by the Group and issued by the structured

entity, with the risk being greatest for the most subordinate class of beneficial interests. These securities are

generally reported in Trading financial assets – corporate and other debt. The Group does not provide

additional support in these transactions through contractual facilities, such as liquidity facilities, guarantees

or similar derivatives. The Group’s maximum exposure to loss generally equals the fair value of the

securities owned.

The Group has not provided financial support to, or otherwise agreed to be responsible for supporting

financially, any unconsolidated structured entity.

Sponsored unconsolidated structured entities

Details of when the Group considers itself the sponsor of certain non-consolidated structured entities is

provided in note 16 of the consolidated financial statements for the year ended 31 December 2018.

The Group has no interest in any sponsored entity at 30 June 2019 or 31 December 2018, where the Group

has been involved with the structured entity through establishing the structured entity, marketing of

products associated with the structured entity in its own name, and/ or through involvement in the design of

the structured entity. The loss related to sponsored entities during the six month period to 30 June 2019 was

$85 million (31 December 2018: gain of $167 million) and $40 million of assets were transferred to those

sponsored entities (31 December 2018: $921 million). It is the investors in the sponsored entity rather than

the Group that are exposed to the carrying value of assets transferred. The Group’s exposure to the

sponsored entity is limited to net amounts receivable from swap transactions with the entity and is not

directly linked to the transferred assets themselves.




41

11. PROVISIONS

Litigation matters

In addition to the matters described below, in the normal course of business, the Group has been named,

from time to time, as a defendant in various legal actions, including arbitrations, class actions and other

litigation, arising in connection with its activities as a global diversified financial services institution.

Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive

damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise

be the primary defendants in such cases are bankrupt or are in financial distress.

The Group is also involved, from time to time, in other reviews, investigations and proceedings (both

formal and informal) by governmental and self-regulatory agencies regarding the Group’s business, and

involving, among other matters, sales and trading activities, financial products or offerings sponsored,

underwritten or sold by the Group, and accounting and operational matters, certain of which may result in

adverse judgments, settlements, fines, penalties, injunctions or other relief.

The Group contests liability and/or the amount of damages as appropriate in each pending matter. Where

available information indicates that it is probable a liability had been incurred at the date of the financial

statements and the Group can reasonably estimate the amount of that loss, the Group accrues the estimated

loss by a charge to income. The Group’s future legal expenses may fluctuate from period to period, given

the current environment regarding government investigations and private litigation affecting global

financial services firms, including the Group.

In many proceedings and investigations, however, it is inherently difficult to determine whether any loss is

probable or even possible, or to estimate the amount of any loss. The Group cannot predict with certainty if,

how or when such proceedings or investigations will be resolved or what the eventual settlement, fine,

penalty or other relief, if any, may be, particularly for proceedings and investigations where the factual

record is being developed or contested or where plaintiffs or government entities seek substantial or

indeterminate damages, restitution, disgorgement or penalties. Numerous issues may need to be resolved,

including through potentially lengthy discovery and determination of important factual matters,

determination of issues related to class certification and the calculation of damages or other relief, and by

addressing novel or unsettled legal questions relevant to the proceedings or investigations in question,

before a loss or additional loss or range of loss or additional loss can be reasonably estimated for a

proceeding or investigation.

Subject to the foregoing, the Group believes, based on current knowledge and after consultation with

counsel, that the outcome of such proceedings and investigations will not have a material adverse effect on

the financial condition of the Group, although the outcome of such proceedings or investigations could be

material to the Group’s operating results and cash flows for a particular period depending on, among other

things, the level of the Group’s revenues or income for such period.

While the Group has identified below certain proceedings that the Group believes to be material,

individually or collectively, there can be no assurance that additional material losses will not be incurred

from claims that have not yet been asserted or are not yet determined to be material.

On 7 March 2019, in the matter styled China Development Industrial Bank v. Morgan Stanley & Co,

Incorporated, et al, the court denied the relief that CDIB sought in a motion to clarify and resettle the

portion of the court’s 21 December 2018 order granting spoliation sanctions.

On 24 April 2019, the parties in California v. Morgan Stanley, et al., reached an agreement to settle the

litigation. The Group will not bear any costs associated with this settlement.

On 19 April 2019, the public prosecutor filed an appeal with the Italian Supreme Court in the matter styled

Case No. 2012/00406/MNV seeking to overturn the decision of the Appellate Division of the Court of

Accounts for the Republic of Italy affirming the decision below declining jurisdiction and dismissing the

claim against the Group. On 14 June 2019, the Group filed its response to the public prosecutor’s appeal.




42

11. PROVISIONS (CONTINUED)

Litigation matters (continued)

On 31 May 2019, the Group and another Morgan Stanley Group affiliate filed their response to the

plaintiff’s appeal in the Court of Appeal of Milan in the matter styled Banco Popolare Societá Cooperativa

v Morgan Stanley & Co. International plc & others.

On 26 June and 2 July 2019, a hearing of the Dutch Tax Authority’s appeal was held in the matters styled

Case number 15/3637 and Case number 15/4353.

Tax related provisions

The Group is subject to tax laws which are complex and subject to different interpretations by the taxpayer

and the relevant governmental taxing authorities. Specifically, in relation to the Group and Morgan Stanley

Group implementing updated transfer pricing policies for certain intercompany transactions, discussions are

on-going with relevant taxing authorities. Management makes judgments and interpretations about the

application of these inherently complex tax laws when determining the provision for taxes. Disputes over

interpretations of the tax laws may be settled with the taxing authority upon examination or audit. The

Group periodically evaluates the likelihood of assessments in each taxing jurisdiction resulting from current

and subsequent years’ examinations. Provisions related to potential losses that may arise from tax audits are

established in accordance with the guidance on accounting for uncertain tax items. The Group has

established provisions that it believes are adequate in relation to the potential for additional assessments.

Whilst a range of outcomes is foreseeable, management considers the amount of the provision to be a

reasonable estimate of expected future liabilities after consideration of all pertinent facts, based on the

status of inquiries at the balance sheet date.

12. DIVIDENDS

On 1 March 2019, 120,000 €1 ordinary shares in MSEHSE and 451,000,000 €1 ordinary shares in MSESE

were transferred from the Company to MSIUK by way of a dividend in specie, with a value of $141,837

and $530,917,133, respectively.

On 31 May 2019, the Directors approved a coupon payment on the AT1 capital instruments of

$118,625,000 (2018: $118,625,000) out of reserves available for distribution at 31 December 2018. The

coupon was paid on 31 May 2019 and has a related full year tax benefit of $32,028,750 (2018:

$32,028,750).

The Directors have not proposed the payment of a final dividend out of reserves available at 30 June 2019

(2018: $nil).




43

13. SEGMENT REPORTING

Segment information is presented in respect of the Group’s business and geographical segments. The

business segments and geographical segments are based on the Group’s management and internal reporting

structure. Transactions between business segments are on normal commercial terms and conditions.

Business segments

Morgan Stanley structures its business segments primarily based upon the nature of the financial products

and services provided to customers and Morgan Stanley’s internal management structure. The Group’s own

business segments are consistent with those of Morgan Stanley.

The Group has one reportable business segment, Institutional Securities, which includes capital raising and

financial advisory services; corporate lending; sales, trading, financing and market-making activities in

equity and fixed income securities and related products, including global macro, credit and commodities

products, and investment activities.

Geographical segments

The Group operates in three geographic regions, being EMEA, the Americas and Asia.

The following table presents selected condensed consolidated income statement and condensed

consolidated statement of financial position information of the Group’s operations by geographic area. The

external revenues (net of interest expense) and total assets disclosed in the following table reflect the

regional view of the Group’s operations, on a managed basis. The basis for attributing external revenues

(net of interest expense) and total assets is determined by a combination of client and trading desk location.

Geographical EMEA Americas Asia Total

Segments

in $ millions 30 June 30 June 30 June 30 June 30 June 30 June 30 June 30 June

2019 2018 2019 2018 2019 2018 2019 2018

External revenues

net of interest 2,207 2,787 128 125 489 531 2,824 3,443

Profit before

income tax 351 788 35 42 104 140 490 970

30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec

2019 2018 2019 2018 2019 2018 2019 2018

Total assets 369,459 325,762 59,223 67,681 59,928 52,756 488,610 446,199




44

14. FINANCIAL RISK MANAGEMENT

14.1 Risk management procedures

The Group’s risk management procedures are consistent with those disclosed in the Group’s consolidated

financial statements for the year ended 31 December 2018. The following disclosure is therefore limited to

providing updated quantitative data for each risk category.

14.2 Market risk

Sensitivity analysis

VaR for the six month period ended 30 June 2019

The table below presents the period end, average, maximum and minimum values for the Group’s

management VaR for the period ending 30 June 2019 compared to the period ending 31 December 2018.

in $ millions

95% / one-day VaR for the six months ended

30 June 2019

95% / one-day VaR for the year ended 31

December 2018

Period end Average Max Min Period end Average Max Min

Market Risk Category:

Interest rate and credit spread 14 14 18 11 13 15 21 11

Equity price 13 12 27 7 7 11 25 7

Foreign exchange rate 6 6 9 3 5 4 8 2

Commodity price 1 2 2 1 2 1 2 1

Less: Diversification

benefit(1)(2) (11) (15) N/A N/A (10) (12) N/A N/A

Primary Risk Categories 23 19 31 15 17 19 31 15

Credit Portfolio(3) 6 5 6 4 4 4 6 3

Less: Diversification

benefit(1)(2) (5) (4) N/A N/A (3) (2) N/A N/A

Total Management VaR 24 20 34 16 18 21 31 15

(1) Diversification benefit equals the difference between total trading VaR and the sum of the VaRs for the four risk categories. This

benefit arises because the simulated one-day losses for each of the four primary market risk categories occur on different days;

similar diversification benefits are also taken into account within each category.

(2) N/A – Not applicable. The minimum and maximum VaR values for the total VaR and each of the component VaRs might have

occurred on different days.

(3) The Credit Portfolio VaR is disclosed as a separate category from the Primary Risk Categories and includes loans that are carried

at fair value and associated hedges as well as counterparty credit valuation adjustments and related hedges.

The Group’s average VaR for Primary Risk Categories for the six month period to 30 June 2019 was $19

million, unchanged compared to the twelve month period to 31 December 2018. On average, increases in

equity risk, foreign exchange rate risk and commodities risk were offset by a reduction in interest rate and

credit risk and increased diversification benefit.

The average Credit Portfolio VaR for the six month period to 30 June 2019 was $5 million, compared with

$4 million for the year to 31 December 2018. This increase was mainly due to increased credit spread risk

from counterparty credit valuation adjustments and related hedges.

The average total Management VaR for the six months ended 30 June 2019 was $20 million compared with

$21 million for the year to 31 December 2018, primarily due to increased diversification benefit.




45

14. FINANCIAL RISK MANAGEMENT (CONTINUED)

14.2 Market risk (continued)

Non-trading risks for the six month period ended 30 June 2019

The Group believes that sensitivity analysis is an appropriate representation of the Group’s non-trading

risks. Reflected below is this analysis, which covers substantially all of the non-trading risk in the Group’s

portfolio, with the exception of counterparty credit valuation adjustments, which are covered in the

previous section.

Interest rate risk

The Group’s VaR excludes certain funding liabilities and money market transactions. The application to

these positions of a parallel increase or decrease in interest rates of 200 basis points would result in a net

loss or gain, respectively, of approximately $69 million as at 30 June 2019, compared to a net loss or gain

of $130 million as at 31 December 2018.

Funding liabilities

The credit spread risk sensitivity of the Group’s mark-to-market funding liabilities corresponds to an

increase in value of approximately $4.7 million and $4.3 million for each 1 basis point widening in the

Group’s credit spread level for 30 June 2019 and 31 December 2018, respectively.

Equity investments price risk

The Group is exposed to equity price risk as a result of changes in the fair value of its investments in listed

and private equities classified as available-for-sale financial assets. These investments are predominantly

equity positions with long investment horizons, the majority of which are for business facilitation purposes.

The market risk related to these investments is measured by estimating the potential reduction in net

revenues associated with a 10% decline in asset values as shown in the table below.


in $ millions 10% sensitivity 10% sensitivity

Investment securities 14 13

Currency risk

The analysis below details the foreign currency exposure for the Group, by foreign currency, relating to the

retranslation of its non-US dollar denominated branches and subsidiaries.

The analysis calculates the impact on total comprehensive income of a reasonably-possible parallel shift of

the foreign currency in relation to the US dollar, with all other variables held constant. This analysis does

not take into account the effect of the foreign currency hedges held by other members of the Morgan

Stanley Group.




46


14.2 Market risk (continued)

Currency risk (continued)

Euro-denominated foreign currency exposure was $50 million at 30 June 2019 as compared to $579 million

at 31 December 2018. This decrease was primarily driven by the transfer during the period of the Euro-

denominated investments in MSEHSE and MSESE by way of a dividend in specie.


Sensitivity to applied

percentage change in currency

(+/-)

Sensitivity to applied

percentage change in currency

(+/-)

in $ millions

Foreign

currency

exposure

Percentage

change

applied

Other

comprehensive

income

Foreign

currency

exposure

Percentage

change

applied

Other

comprehensive

income

% %

Euro 50 14% 7 579 14% 81

Taiwan New Dollar 127 8% 10 128 8% 10

Polish Zloty 5 17% 1 5 17% 1

South Korean Won 251 11% 28 246 11% 27

Swiss Franc 22 4% 1 21 12% 3

455 47 979 122

14.3 Credit Risk

14.3.1 Credit risk management

Refer to pages 10 to 12 of the interim management report and to pages 18 to 22 of the strategic report in the

consolidated financial statements for the year ended 31 December 2018 for details of the Group’s credit

risk management processes.

14.3.2 Exposure to credit risk

The maximum exposure to credit risk (“gross credit exposure”) of the Group as at 30 June 2019 is disclosed

on the following page, based on the carrying amounts of the financial assets and the maximum amount that

the Group could have to pay in relation to unrecognised financial instruments, which the Group believes are

subject to credit risk. The table includes financial instruments subject to expected credit losses (“ECL”) and

not subject to ECL.

Where the Group enters into credit enhancements, including receiving cash and security as collateral and

master netting agreements, to manage the credit exposure on these financial instruments the financial effect

of the credit enhancements is disclosed below. The net credit exposure represents the credit exposure

remaining after the effect of the credit enhancements.

Trading financial assets, excluding derivatives, are subject to traded credit risk through exposure to the

issuer of the financial asset; the Group manages this issuer credit risk through its market risk management

infrastructure and this traded credit risk is incorporated within the VaR-based risk measures included in the

market risk disclosure.




47


14.3 Credit Risk (continued)

14.3.2 Exposure to credit risk(continued)

Exposure to credit risk by class


Class

in $ millions Gross credit

exposure

Credit

enhance-

ments

Net credit

exposure(1) Gross credit

exposure

Credit

enhance-

ments

Net credit

exposure(1)

Subject to ECL:

Cash and short term deposits 33,258 - 33,258 30,829 - 30,829

Loans and advances 187 - 187 825 - 825

Trade and other receivables(2) 66,928 - 66,928 64,314 - 64,314

Not subject to ECL:

Trading financial assets - derivatives 203,147 (196,999) 6,148 179,311 (173,250) 6,061

Secured financing 94,788 (93,888) 900 95,643 (94,546) 1,097

Loans and advances 13 - 13 11 - 11

Trade and other receivables(2) 795 (302) 493 780 (370) 410

399,116 (291,189) 107,927 371,713 (268,166) 103,547

Unrecognised financial instruments

Subject to ECL:

Loan commitments 1,685 - 1,685 1,556 - 1,556

Letters of credit 1 - 1 1 - 1

Not subject to ECL:

Loan commitments 1,156 (607) 549 752 (84) 668

Letters of credit 288 (287) 1 1 - 1

Unsettled securities purchased

iiiunder agreements to resell(3) 64,712 - 64,712 34,623 - 34,623

Total unrecognised financial

iiiinstruments 67,842 (894) 66,948 36,933 (84) 36,849

466,958 (292,083) 174,875 408,646 (268,250) 140,396

(1) Of the residual net credit exposure, intercompany cross product netting arrangements are in place which would allow for an

additional $3,619 million of an available $27,124 million (31 December 2018: $4,392 million of an available $29,892 million) to be offset in the event of default by certain Morgan Stanley counterparties.

(2) Trade and other receivables primarily include cash collateral pledged against the payable on OTC derivative positions. These

derivative liabilities are included within trading financial liabilities in the condensed consolidated statement of financial

position.

(3) For unsettled securities purchased under agreements to resell, collateral in the form of securities will be received at the point of

settlement. Since the value of collateral is determined at a future date, it is currently unquantifiable and not included in the table.

The impact of master netting arrangements and similar agreements on the Group’s ability to offset financial

assets and financial liabilities is disclosed in note 15.




48



14.3.3 Credit quality

Exposure to credit risk by internal rating grades

Internal credit ratings, as below, are derived using methodologies generally consistent with those used by

external agencies:

Investment grade: AAA - BBB

Non-investment grade: BB - CCC

Default: D

The table below shows gross carrying amount and, in the case of unrecognized financial instruments,

nominal amounts by internal rating grade. All exposures subject to ECL are Stage 1, unless otherwise

shown.

Until 31 December 2018, unless credit-impaired, the Group had reported all trade receivables as Stage 2 for

the purpose of the disclosure below, reflecting the Group’s accounting policy to measure lifetime credit

losses on trade receivables under the simplified approach. From 1 January 2019, the Group continues to

apply the simplified approach but, notwithstanding the recognition of lifetime credit losses under the

simplified approach, has revised the presentation of these balances such that trade receivables are now

reported as Stage 1 where they are not credit-impaired.

The Group believes that this presentation, which is more consistent with industry practice for such

disclosures, better reflects the credit risk associated with such assets, notwithstanding the fact that a lifetime

approach is used for their ECL measurement and provides more relevant information. This change has also

been applied to the prior period disclosure below. There is no impact on the reported level of ECLs as a

consequence of this presentational change.




49



14.3.3 Credit quality (continued)

Exposure to credit risk by internal rating grades (continued)

At 30 June 2019

in $ millions AAA AA A BBB

Total

Investment

Grade

Non-

Investment

Grade

Unrated(1)/

Default(2)

Total

Gross

Carrying

Amount

Loss

Allowance

Total

Carrying

Amount

Subject to ECL:

Cash and short term

deposits 13,533 6,556 12,573 493 33,155 103 - 33,258

- 33,258

Loans and advances

iiStage 1 - - 124 29 153 20 - 173 - 173

iiStage 2 - - - - - 14 - 14 - 14

Trade and other receivables:

Stage 1 2,305 4,348 43,487 10,032 60,172 5,629 1,091 66,892 - 66,892

Stage 3 - 1 4 18 23 11 43 77 (41) 36

Total subject to ECL 15,838 10,905 56,188 10,572 93,503 5,777 1,134 100,414 (41) 100,373

Not subject to ECL:

Trading financial assets -

xxderivatives 4,280ii 11,048ii 124,672ii 46,868ii 186,868ii 16,250ii 29ii 203,147ii

-ii 203,147ii

Secured financing 2,187ii 21,071ii 45,045ii 21,158ii 89,461ii 5,050ii 277ii 94,788ii -ii 94,788ii

Loans and advances -ii -ii -ii -ii -ii 13ii -ii 13ii -ii 13ii

Trade and other receivables -ii 35ii 229ii 166ii 430ii 365ii -ii 795ii -ii 795ii

Total not subject to ECL 6,467ii 32,154ii 169,946ii 68,192ii 276,759ii 21,678ii 306ii 298,743ii -ii 298,743ii


instruments subject to

ECL:

Loan commitments

Stage 1 - 432i 766ii 309i 1,507i 152i -ii 1,659ii -ii 1,659ii

Stage 2 - - - -ii -ii 26i -ii 26ii -ii 26ii

Letters of credit - - - -ii -ii 1i -ii 1ii -ii 1ii

Total unrecognised

financial instruments

subject to ECL - 432i 766ii 309i 1,507i 179i -ii 1,686ii -ii 1,686ii


instruments not subject to

ECL:

Unsettled securities

purchased under agreements

to resell 177ii 31,244ii 11,500ii 17,274i 60,195ii 4,517ii -ii 64,712ii -ii 64,712ii

Letters of credit -iii -iii -iii -ii -iii 288ii -ii 288ii -ii 288ii

Loan commitments -iii 137iii 10102ii 201i 440ii 690ii 26ii 1,156ii -ii 1,156ii

Total unrecognised

financial instruments not

subject to ECL 177ii 31,381ii 11,602ii 17,475i 60,635ii 5,495ii 26ii 66,156ii -ii 66,156ii

(1) For the unrated trade receivables, a lifetime ECL is always calculated without considering whether SICR has occurred.

(2) At 30 June 2019 there were $10 million of Stage 3 Trade and other receivables and $10 million of Trading financial assets – derivatives in default.




50



14.3.3 Credit quality (continued)

Exposure to credit risk by internal rating grades (continued)

At 31 December 2018

in $ millions AAA AA A BBB

Total

Investment

Grade

Non-

Investment

Grade

Unrated/

Default(1)

Total

Gross

Carrying

Amount

Loss

Allowance

Total

Carrying

Amount

Subject to ECL:

Cash and short term deposits 8,233 7,606 13,918 916 30,673 156 - 30,829 - 30,829

Loans and advances - - 98 705 803 22 - 825 - 825


Stage 1 1,707 3,860 39,279 8,622 53,468 6,907 3,913 64,288 - 64,288

Stage 3 - 5 8 29 42 1 20 63 (37) 26

Total subject to ECL 9,940 11,471 53,303 10,272 84,986 7,086 3,933 96,005 (37) 95,968

Not subject to ECL:

Trading financial assets -

derivatives 4,602ii 12,021ii 106,983ii 41,482ii 165,088ii 13,585ii 638ii 179,311ii -ii 179,311ii

Secured financing 3,895ii 20,145ii 49,719ii 18,445ii 92,204ii 3,423ii 16ii 95,643ii -ii 95,643ii

Loans and advances -ii -ii -ii -ii -ii 11ii -ii 11ii -ii 11ii

Trade and other receivables -ii -ii 461ii 178ii 639ii 141ii -ii 780ii -ii 780ii

Total not subject to ECL 8,497 32,166 157,163 60,105ii 257,931ii 17,160ii 654ii 275,745ii -ii 275,745ii


instruments subject to ECL:

Loan commitments:

Stage 1 -ii 435i 683ii 294i 1,412ii 116ii -ii 1,528ii -ii 1,528ii

Stage 2 -ii -ii -iii -ii -ii 29ii -ii 29ii -ii 29ii

Letters of credit -ii -ii -iii -ii -ii 1ii -ii 1ii -ii 1ii


instruments subject to ECL -ii 435i 683ii 294i 1,412i 146ii -ii 1,558ii -ii 1,558ii



ECL:


under agreements to resell - 17,167 7,732 8,579 33,478 1,146 - 34,624 - 34,624

Letters of credit - - - - - 1 - 1 - 1

Loan commitments - 137 246 203 586 159 6 751 - 751



ECL - 17,304 7,978 8,782 34,064 1,306 6 35,376 - 35,376

(1) At 31 December 2018 there were $10 million of stage 3 Trade and other receivables in default.




51


14.4 Liquidity and funding risk

Maturity analysis

in $ millions

30 June 2019 On demand

Less than

1 month

1 month –

3 months

3 months –

1 year

1 year –

5 years

Greater

than 5

years Total

Financial liabilities

Bank loans and overdrafts 3 - - - - - 3

Trading financial liabilities:

Derivatives 201,277 - - - - - 201,277

Other 47,515 - - - - - 47,515

Secured borrowing 67,432 6,572 2,243 2,534 2,377 - 81,158

Trade and other payables 87,962 1 1 482 243 171 88,860

Debt and other borrowings 625 166 14,722 1,378 24,180 10,351 51,422

Total financial liabilities 404,814 6,739 16,966 4,394 26,800 10,522 470,235


instruments

Guarantees 333 - - - - - 333

Letters of credit - - - 287 2 - 289

Loan commitments 2,841 - - - - - 2,841

Underwriting commitments 263 - - 841 - - 1,104


iiiiunder agreements to resell(1) 60,974 224 2,228 1,285 - - 64,711

Other commitments 141 - - - - - 141

Total unrecognised

iiiifinancial instruments 64,552 224 2,228 2,413 2 - 69,419

(1) The Group enters into forward starting reverse repurchase agreements (agreements which have a trade date at or prior to 30 June 2019

and settle subsequent to period end). These agreements primarily settle within three business days and of the total amount at 30 June 2019,

$60,974 million settled within three business days.




52


14.4 Liquidity and funding risk (continued)

Maturity analysis (continued)

in $ millions

On

demand

Less than

1 month

1 month -

3 months

3 months -

1 year

1 year –

5 years

Greater

than 5

years Total

31 December 2018

Financial liabilities

Bank loans and overdrafts 4 - - - - - 4


Derivatives 174,113 - - - - - 174,113

Other 42,980 - - - - - 42,980

Secured Borrowing 54,579 7,737 7,026 5,629 4,018 - 78,989

Trade and other payables 90,610 - 267 100 11 560 91,548

Debt and other borrowings 1,629 95 3,451 1,099 21,281 13,362 40,917

Total financial liabilities 363,915 7,832 10,744 6,828 25,310 13,922 428,551


instruments

Guarantees 405 - - - - - 405

Letters of credit - - - - 2 - 2

Loan commitments 2,308 - - - - - 2,308

Underwriting

commitments - - - 687 - - 687


iiiunder agreements to resell(1) 31,955 1,689 - 979 - - 34,623

Other commitments 22 - - - - - - 22

Total unrecognised

financial instruments 34,690 1,689 - 1,666 2 - 38,047

(1) The Group enters into forward starting reverse repurchase agreements (agreements which have a trade date at or prior to 31

December 2018 and settle subsequent to period end). These agreements primarily settle within three business days and of the total amount at 31 December 2018, $31,955 million settled within three business days.

15. FINANCIAL ASSETS AND FINANCIAL LIABILITIES SUBJECT TO OFFSETTING

In the following table:

‘Gross amounts’ include transactions which are not subject to master netting agreements or collateral

agreements or are subject to such agreements but the Group has not determined the agreements to be

legally enforceable.

‘Amounts offset’ are transactions offset in the statement of financial position where there is a legally

enforceable master netting arrangement that provides for a current right of offset and there is an

intention to either settle on a net basis or to realise the asset and liability simultaneously.

‘Net amounts’ are those amounts presented net in the statement of financial position.

‘Amounts not offset’ are the amounts included in the ‘Net exposure’ which are either not subject to

master netting agreements or collateral agreements or are subject to such agreements but the Group

has not determined the agreement to be legally enforceable.




53

15. FINANCIAL ASSETS AND FINANCIAL LIABILITIES SUBJECT TO OFFSETTING (CONTINUED)

Amounts

offset(1)

Net amounts

Amounts not offset(3)(4)

Gross

amounts

Financial

instruments

Cash

collateral(2)

Net

exposure(5)

Not subject to

netting

agreement

in $ millions

30 JUNE 2019

Secured financing:

Cash collateral on securities borrowed 29,855 (8,700) 21,155 (20,722) - 433 177

Securities purchased under agreement to

iiiresell 171,441 (113,099) 58,342 (57,875) - 467 466

Trading financial assets - derivatives 275,385 (72,238) 203,147 (170,123) (26,842) 6,182 1,121

TOTAL ASSETS AS AT 30 JUNE 2019 476,681 (194,037) 282,644 (248,720) (26,842) 7,082 1,764

Secured borrowing:

Cash collateral on securities loaned 29,897 (8,700) 21,197 (21,190) - 7 -

Securities sold under agreement to

iiirepurchase 148,080 (113,099) 34,981 (33,815) - 1,166 570

Trading financial liabilities - derivatives 273,001 (71,724) 201,277 (166,640) (26,195) 8,442 1,736

TOTAL LIABILITIES AS AT 30 JUNE

2019 450,978 (193,523) 257,455 (221,645) (26,195) 9,615 2,306

31 DECEMBER 2018

Secured financing:

Cash collateral on securities borrowed 32,353 (9,231) 23,122 (22,566) - 556 240

Securities purchased under agreement to

iiiresell 177,283 (112,411) 64,872 (64,331) - 541 533

Trading financial assets - derivatives 231,328 (52,017) 179,311 (149,608) (23,531) 6,172 1,287

TOTAL ASSETS AS AT 31

DECEMBER 2018 440,964 (173,659) 267,305 (236,505) (23,531) 7,269 2,060

Secured borrowing:

Cash collateral on securities loaned 30,334 (9,231) 21,103 (20,767) - 336 336

Securities sold under agreement to

iiirepurchase 153,887 (112,411) 41,476 (39,622) - 1,854 1,009

Trading financial liabilities - derivatives 225,677 (51,564) 174,113 (144,279) (19,509) 10,325 1,760

TOTAL LIABILITIES AS AT 31

DECEMBER 2018 409,898 (173,206) 236,692 (204,668) (19,509) 12,515 3,105

(1) Include $4,895 million and $4,380 million (31 December 2018: $4,422 million and $3,969 million) of cash collateral related to trading financial assets

– derivatives and trading financial liabilities – derivatives, respectively. (2) Cash collateral not offset is recognised within Trade and other receivables and Trade and other payables, respectively.

(3) In addition to the balances disclosed in the table above, certain other secured financing and secured borrowing have legally enforceable master netting

arrangements in place. As a result, $2,999 million (31 December 2018: $2,686 million) of netting is included within the condensed consolidated statement of financial position.

(4) In addition to the balances disclosed in the table above, $179 million (31 December 2018: $8 million) not presented net of certain trade and other

receivables and trade and other payables have legally enforceable master netting arrangements in place and can be offset in the ordinary course of business and/or in the event of default.

(5) Intercompany cross-product legally enforceable netting arrangements are in place which would allow for an additional $3,652 million (31

December 2018: $4,392 million) of the total condensed consolidated statement of financial position, to be offset in the ordinary course of business and/ or in the event of default. The additional amounts for offset would include a portion of the residual net exposure.




54

16. FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE

a. Financial assets and liabilities recognised at fair value on a recurring basis

The following tables present the carrying value of the Group’s financial assets and financial liabilities recognised at fair

value on a recurring basis, classified according to the fair value hierarchy. The information below is limited to

quantitative information and should be read in conjunction with note 27 of the consolidated financial statements for the

year ended 31 December 2018.

30 June 2019 Valuation techniques:

Quoted prices in

active market

Observable

inputs

Significant

unobservable

inputs

in $ millions (Level 1) (Level 2) (Level 3) Total


Government debt securities 18,050 2,517 5 20,572

Corporate and other debt - 10,396 402 10,798

Corporate equities 57,171 373 22 57,566

Derivatives:

Interest rate contracts 14 78,060 1,146 79,220

Credit contracts - 4,389 473 4,862

Foreign exchange and gold contracts - 85,853 62 85,915

Equity contracts 1,097 27,730 1,857 30,684

Commodity contracts 424 2,014 28 2,466

Total trading financial assets 76,756 211,332 3,995 292,083

Secured financing:

Cash collateral on securities borrowed - 21,155 - 21,155

Securities purchased under agreements to resell - 57,787 555 58,342

Other secured financing - 15,291 - 15,291

Total secured financing - 94,233 555 94,788

Loans and advances - corporate loans - 13 - 13

Investment securities - corporate equities 16 - 122 138


Prepaid OTC contracts - 611 162 773

Margin loans - - - -

Other receivables - - 22 22

Total trade and other receivables - 611 184 795

Total financial assets measured at fair value 76,772 306,189 4,856 387,817





Derivatives:

Interest rate contracts 41 75,784 530 76,355


Foreign exchange and gold contracts 1 84,864 90 84,955

Equity contracts 888 28,979 2,567 32,434


Total trading financial liabilities 42,668 202,387 3,737 248,792

Secured borrowing:

Cash collateral on securities loaned - 1 - 1

Securities sold under agreements to repurchase - 12,468 - 12,468

Other secured borrowing - 24,934 - 24,934

Total secured borrowing - 37,403 - 37,403

Trade and other payables:


Unfunded loan commitments - 8 - 8

Total trade and other payables - 679 199 878

Debt and other borrowings - issued structured notes - 6,674 341 7,015

Total financial liabilities measured at fair value 42,668 247,143 4,277 294,088




55

16. FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE (CONTINUED)

a. Financial assets and liabilities recognised at fair value on a recurring basis (continued)

31 December 2018 Valuation techniques:

Quoted prices in

active market

Observable

inputs

Significant

unobservable

inputs

in $ millions (Level 1) (Level 2) (Level 3) Total





Derivatives:



Foreign exchange and gold contracts 1 72,259 49 72,309



Total trading financial assets 60,299 189,463 3,426 253,188

Secured financing:

Cash collateral on securities borrowed - 23,122 - 23,122

Securities purchased under agreements to

resell - 64,555 317 64,872

Other - 7,649 - 7,649

Total secured financing - 95,326 317 95,643

Loans and advances - corporate loans - 11 - 11

Investment securities - corporate equities 14 33 85 132



Margin loans - 11 130 141

Other - - 17 17

Total trade and other receivables - 510 270 780

Total financial assets measured at fair value 60,313 285,343 4,098 349,754


Government debt securities 16,640 1,295 - 17,935

Corporate and other debt - 4,593 - 4,593


Derivatives:



Foreign exchange and gold contracts - 72,521 74 72,595



Total trading financial liabilities 37,675 176,474 2,944 217,093

Secured borrowing:

Cash collateral on securities loaned - 366 - 366

Securities sold under agreements to

repurchase - 15,868 - 15,868

Other secured borrowing - 16,348 - 16,348

Total secured borrowing - 32,582 - 32,582



Unfunded loan commitments - 10i - 10

Total trade and other payables - 638 259 897

Debt and other borrowings - issued structured

notes - 5,217 447 5,664

Total financial liabilities measured at fair value 37,675 214,911 3,650 256,236




56


b. Changes in Level 3 financial assets and liabilities recognised at fair value on a recurring basis

In the following tables:

‘Sales and Issuances’ amounts are reported together. Net derivatives, prepaid OTC liability contracts

and issued structured notes represent issuances. Amounts for other lines items represent sales.

For financial assets and financial liabilities that were transferred into and out of Level 3 during the

period, gains or (losses) are presented as if the assets or liabilities had been transferred into or out of

Level 3 as at the beginning of the period.

Net derivative contracts represent trading financial liabilities – derivative contracts net of trading

financial assets – derivative contracts.




57


b. Changes in Level 3 assets and liabilities measured at fair value on a recurring basis (continued) 30 June 2019

in $ millions

Balance at

1 January

2019

Total gains or

(losses)

recognised in

condensed

consolidated

income

statement(1)

Pu

rch

ase

s

Sale

s an

d I

ssu

an

ces

Sett

lem

en

ts Net

transfers

in and / or

out of

Level 3

Balance

at 30 June

2019

Unrealised gains

or (losses) for

level 3 assets/

liabilities

outstanding as at

30 June 2019


Government debt securities 13 - 2 (2) - (8) 5 -

Corporate and other debt 318 25 64 (159) - 154 402 17

Corporate equities 33 (4) 7 (7) - (7) 22 (1)

Net derivative contracts 127 (173) 392 (467) (10) (35) (166) (106)

Total trading financial assets 491 (152) 465 (635) (10) 104 263 (90)

Secured financing:

Cash collateral on securities borrowed 317 - 555 (317) - - 555 -

Total secured financing 317 - 555 (317) - - 555 -

Investment securities - corporate

equities 85 5 - (1) - 33 122 5


Prepaid OTC contracts 123 - 46 (7) - - 162 -

Margin loans 130 - - (57) - (73) - -

Other 17 - 5 - - - 22 -

Total trade and other receivables 270 - 51 (64) - (73) 184 -

Total financial assets measured at

fair value 1,163 (147) 1,071 (1,017) (10) 64 1,124 (85)


Government debt securities - - - 1 - - 1 -

Corporate and other debt - - - 2 - - 2 -

Corporate equities 9 1 (7) 1 - - 2 -

Total trading financial liabilities 9 1 (7) 4 - - 5 -


Prepaid OTC contracts 259 10 - 34 (90) 6 199 10

Debt and other borrowings - issued structured notes 447 (31) - 66 (48) (155) 341 (32)

Total financial liabilities measured

at fair value 715 (20) (7) 104 (138) (149) 545 (22)

(1) At 30 June 2019 there was $(8) million of total losses relating to Debt and other borrowings – issued structured notes recognised

in condensed consolidated other comprehensive income.




58


b. Changes in Level 3 assets and liabilities measured at fair value on a recurring basis (continued) 31 December 2018

in $ millions

Balance

at 1

January

2018

Impact of

adopting

IFRS 9

Total gains

or (losses)

recognised in

condensed

consolidated

income

statement(1) Pu

rch

ase

s

Sale

s an

d i

ssu

an

ces (

2)

Sett

lem

en

ts

Net transfers in

and / or out of

Level 3 (2)

Balance

at 31

December

2018

Unrealised

gains or

(losses) for

level 3 assets/

liabilities

outstanding as

at 31 December

2018 (3)


Government debt securities 1 - - 11 - - 1 13 -

Corporate and other debt 401 (17) 75 227 (201) - (167) 318 (5)

Corporate equities 77 - 2 9 (21) - (34) 33 4

Total trading financial assets 479 (17) 77 247 (222) - (200) 364 (1)

Secured financing:


agreements to resell - - - 317 - - - 317 -

Loans and advances -

corporate loans - 17 - - (17) - - - -

Investment securities -

corporate equities 93 - (3) - (5) - - 85 (3)


Prepaid OTC contracts 106 - (6) 25 (2) - - 123 -

Margin loans 229 - (45) - (48) - (6) 130 (45)

Other - 9 - 8 - - - 17 -

Total trade and other

receivables 335 9 (51) 33 (50) - (6) 270 (45)

Total financial assets

measured at fair value 907 9 23 597 (294) - (206) 1,036 (49)


Corporate equities 15 - 4 (7) 5 - - 9 3

Net derivative contracts(3) 95 - 360 (735) 1,276 (113) (290) (127) 352

Total trading financial

liabilities 110 364 (742) 1,281 (113) (290) (118) 355

Trade and other payables -

prepaid OTC contracts 169 - 4 (24) 118 - - 259 4

Debt and other borrowings -

issued structured notes 361 - 40 - 99 (39) 66 447 38

Total financial liabilities

measured at fair value 640 - 408 (766) 1,498 (152) (224) 588 397

(1) At 31 December 2018 there was $26 million of total gains relating to Debt and other borrowings – issued structured notes

recognised in condensed consolidated other comprehensive income.




59


c. Valuation of Level 3 financial assets and liabilities recognised at fair value on a recurring basis

The following disclosures provide information on the sensitivity of fair value measurements to key inputs

and assumptions.

i. Quantitative information about and qualitative sensitivity of significant unobservable inputs

The following table provides information on the valuation techniques, significant unobservable inputs

and their ranges and averages for each material category of assets and liabilities measured at fair value

on a recurring basis.

30 June 2019

Fair value

$ millions

Predominant valuation techniques/

Significant unobservable inputs

Range (2)

(Weighted averages or simple

averages/median)(3)

ASSETS


- Corporate and other debt:

- Mortgage- and asset backed

securities

182 Comparable pricing

Comparable bond price

3 to 78 pts (63 pts)

- Corporate bonds 172 Comparable pricing


43.75 to 117 pts (104.24 pts)

- Loans and lending commitments 48 Comparable pricing

Comparable loan price

25.5 to 100 bps (65.4 pts)

- Corporate equities 22 Comparable pricing

Comparable equity price

100% (100%)

- Net derivative contracts:(1))

- Interest rate 616 Option Model

Inflation volatility

Interest rate – Foreign

exchange correlation

Interest rate curve correlation

Inflation curve

Interest rate volatility skew

Foreign exchange volatility

skew

Interest rate – Inflation

correlation

Deal contingent swap

23% to 62% (43%/40%)

55% to 57% (56%/56%)

47% to 96% (74%/73%)

1.06% to 1.06% (1.05%/1.07%)

25% to 124% (71%/54%)

-0.2% to -0.15% (-0.21%/0.22%)

-75% to -5%(-39%/-45%)

89% to -90.97% (90%/90%)

- Credit (35) Comparable pricing

Credit Spread


Funding Spread

Correlation Model

Credit Correlation

9bps to 915bps (229bps)

7 to 82 pts (52 pts)

63bps to 105bps (95pbs)

32.97% to 63.81% (38%)

- Foreign exchange and gold (28) Option Model

Interest rate – Foreign



Deal Execution Probability


skew

Currency basis

55% to 57% (56%/56%)

50% to 52% (51%/51%)

93.33% to 98% (96%/97%)

-3.1% to -2.9% (-3.1%-3.12%)

8.23% to 10.34%(9.95%/10.3%)




60


c. Valuation of Level 3 financial assets and liabilities recognised at fair value on a recurring basis

(continued)

i. Quantitative information about and qualitative sensitivity of significant unobservable inputs

(continued)

30 June 2019

Fair value

$ millions



Range (2)


averages/median)(3)

ASSETS


- Net derivative contracts:(1))

- Equity (710) Option Model

At the money volatility

Volatility skew

Equity-equity correlation

Equity FX correlation

6% to 58% (22%)

-2% to 0% (0%)

5% to 96% (70%)

-95% to 55% (-42%)

- Commodity (9) Comparable pricing

Comparable price

$498 to $1,822 ($1,115)

Investment securities:



97% to 100% (98%)


-Prepaid OTC contracts

162 Discounted cash flow

Recovery rate

12% to 71% (33%)

Securities Borrowings:

- Securities purchased under agreements

to resell

555 Risk based valuation

Comparable collateral

price

19 to 92 (55.5)

LIABILITIES

Debt and other borrowings:

- Issued structured notes (341) Option Model


Volatility skew


Equity FX correlation

6% to 35% (20%)

-1% to 0% (0%)

39% to 90% (79%)

-72% to 13% (-25%)


- Prepaid OTC contracts (199) Option Model


Discounted cash flow

Recovery rate

10% to 40% (30%)

12% to 71% (54%/33%)

(1) Net derivative contracts represent trading financial liabilities – derivative contracts net of trading financial assets – derivative contracts and

include derivative contracts with multiple risks (i.e. hybrid products). CVA and FVA are included in fair value, but excluded from the valuation

techniques and significant unobservable inputs in the table. CVA is a level 3 input when the underlying counterparty credit curve is unobservable. FVA is a Level 3 input in its entirety given the lack of observability of funding spreads in principal market.

(2) The ranges of significant unobservable inputs are represented in points, percentages or basis points. Points are a percentage of par; for

example, 100 points would be 100% of par. A basis point equals 1/100th of 1%; for example, 353 basis points would equal 3.53%.

(3)Amounts represent weighted averages except where simple averages and the median of the inputs are provided when more relevant.




61


c. Valuation of Level 3 financial assets and liabilities recognised at fair value on a recurring basis (continued)

i. Quantitative information about and qualitative sensitivity of significant unobservable inputs (continued)

31 December 2018

Fair value

$ millions



Range (2)


averages/median)(3)

ASSETS


- Corporate and other debt:

- Mortgage and asset-backed

securities



3 to 99.5 pts (78 pts)

- Corporate bonds 120 Comparable pricing


65 to 119 pts (91 pts)

- Loans and lending

commitments


Comparable loan price

49 to 100 pts (72.56 pts)



100% (100%)


- Prepaid OTCs

- Margin loans

123

130

Discounted cash flow

Recovery Rate

Option Model

Volatility skew

22% (22%)

-1% (-1%)




100% (100%)

Securities Borrowings:

- Securities purchased under

agreements to resell

317 Risk based valuation

Comparable collateral price

33 to 119 (76)

LIABILITIES


- Net derivatives contracts:(1)(4)(5)

- Interest rate 555 Option Model

Inflation Volatility

Interest rate - Foreign


Interest Rate Curve

Correlation

Inflation Curve



skew

Interest rate – Inflation

correlation

Interest rate quanto correlation

23% to 65% (44%/40%)

53% to 56% (55%/55%)

41% to 97% (71%/73%)

1.23% to 1.27% (1.25%/1.25%)

10% to 95% (48%/50%)

-0.3% to -0.18% (-0.24%/-0.24%)

-75% to -5% (-36%/-43%)

-8% to -8% (-8%/-8%)

- Credit (15) Comparable pricing

Credit Spread


Funding Spread

150bps to 499bps (353bps)

10 to 87 pts (46 pts)

69.44bps to 98.23bps (82.38 bp)

- Foreign exchange and gold (25) Option Model

Interest rate-Foreign exchange

correlation


Deal Execution Probability

Foreign Exchange Volatility

Skew

53% to 56% (55%/55%)

10% to 66% (29%/27%)

90% to 95% (95%/95%)

-0.3% to -0.18% (-0.24%/-0.24%)




62


c. Valuation of Level 3 financial assets and liabilities recognised at fair value on a recurring basis (continued)

i. Quantitative information about and qualitative sensitivity of significant unobservable inputs (continued)

31 December 2018 Fair value

$ millions



Range (2)


averages/median)(3)

LIABILITIES


- Equity (374) Option model


Volatility skew


Equity-FX correlation

6% to 63% (26%)

-2% to 0% (-1%)

5% to 98% (70%)

-95% to 55% (-46%)

- Commodity (14) Comparable pricing

Comparable price

$449 to $1,440 ($1,086)

Debt and other borrowings:

- Issued structured notes (447) Option Model


Volatility skew


Equity-FX correlation

6% to 35% (23%)

-2% to 0% (0%)

45% to 98% (91%)

-72% to 13% (-37%)


- Prepaid OTC contracts (259) Option Model


4% to 30% (12%)

(1) Net derivative contracts represent trading financial liabilities – derivative contracts net of trading financial assets – derivative contracts and

include derivative contracts with multiple risks (i.e. hybrid products). CVA and FVA are included in fair value, but excluded from the valuation

techniques and significant unobservable inputs in the table. CVA is a level 3 input when the underlying counterparty credit curve is unobservable. FVA is a Level 3 input in its entirety given the lack of observability of funding spreads in principal market.

(2) The ranges of significant unobservable inputs are represented in points, percentages or basis points. Points are a percentage of par; for

example, 100 points would be 100% of par. A basis point equals 1/100th of 1%; for example, 353 basis points would equal 3.53%.

(3)Amounts represent weighted averages except where simple averages and the median of the inputs are provided when more relevant.

A description of the significant unobservable inputs and qualitative sensitivity included in the table above

for all major categories of assets and liabilities is included within note 31 of the consolidated financial

statements for the year ended 31 December 2018.

ii. Sensitivity of fair values to changing significant assumptions to reasonably possible alternatives

The following tables present the potential impact of both favourable and unfavourable changes, both of

which would be reflected in the income statement. The information below is limited to quantitative

information and should be read in conjunction with note 32 of the Group’s annual financial statements





63

16. FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE (CONTINUED) ii. Sensitivity of fair values to changing significant assumptions to reasonably possible alternatives

(continued)

June 30, 2019 December 31, 2018

in $ millions

Favourable

changes

Unfavourable

changes

Favourable

changes

Unfavourable

changes


Corporate and other debt 9i (9)i 11i (11)ii

Corporate equities 1i (3)i 2i (7)ii

Net derivative contracts(1)

-ii -i 17i (21)ii


Corporate equities 37i (24)i 36i (30)ii


Net derivative contracts(1)

32i (31)i -ii -iii

79i (67)i 66i (69)ii

(1) Net derivative contracts represent financial liabilities classified as held for trading – derivative contracts net of financial assets classified as held for trading – derivative contracts. CVA and FVA are included in the fair value, but excluded from the effect of

reasonably possible alternative assumptions in the table above. CVA is deemed to be a level 3 input when the underlying counterparty

credit curve is unobservable. FVA is deemed to be a Level 3 input in its entirety given the lack of observability of funding spreads in the principal market.

d. Financial instruments valued using unobservable market data

The amounts not recognised in the condensed consolidated income statement relating to the difference

between the fair value at initial recognition (the transaction price) and the amounts determined at initial

recognition using valuation techniques are as follows:


$ millions $ millions

At 1 January 290 280

New transactions 53 134

Amounts recognised in the consolidated income statement

during the period/year (40) (124)

At 30 June 2019 / 31 December 2018 303 290

e. Assets and liabilities measured at fair value on a non-recurring basis

Non-recurring fair value measurements of assets and liabilities are those which are required or permitted in

the condensed consolidated statement of financial position in particular circumstances. There were no

assets or liabilities measured at fair value on a non-recurring basis during the current or prior period.




64

17. ASSETS AND LIABILITIES NOT MEASURED AT FAIR VALUE

For all financial instruments not carried at fair value, the carrying value is a reasonable approximation of

fair value as at 30 June 2019 owing to their short-term nature, with the exception of $5,000 million of

subordinated loan liabilities for which the Level 2 fair value is $5,394 million. At 31 December 2018 the

carrying value was a reasonable approximation of fair value for all financial instruments not carried at fair

value.

18. RELATED PARTY DISCLOSURES

The management and execution of business strategies on a global basis results in many Morgan Stanley

transactions impacting a number of Morgan Stanley Group entities. The Morgan Stanley Group operates a

number of intra-group policies to ensure arm’s length pricing.

The Group receives and incurs management charges to and from other Morgan Stanley Group undertakings

for infrastructure services, including the provision of staff and office facilities. For the six month period

ended 30 June 2019 ‘management charges from other Morgan Stanley Group undertakings relating to staff

costs’ were $850 million (30 June 2018: $963 million) and ‘management charges from other Morgan

Stanley Group undertakings relating to other services’ were $656 million (30 June 2018: $554 million). See

note 3 for further details.

19. EVENTS AFTER THE REPORTING PERIOD

On 1 July 2019, 1,779 staff were transferred from Morgan Stanley Employment Services UK Limited, a

wholly owned subsidiary of Morgan Stanley International Limited, to the Company. This will result in an

increase in Direct staff costs and a reduction in ‘management charges from other Morgan Stanley Group

undertakings relating to staff costs’ in future reporting periods.

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